The Volvo Group is one of the leading suppliers of commercial
transport solutions providing products such as trucks,
buses, construction equipment, drive systems for marine
and industrial applications as well as aircraft engine components. The Volvo Group also offers its customers
financial services.
The Group has about 83,000 employees, production facilities
in 18 countries, and sales activities in some 180 countries.
During 2006 Volvo Group sales rose 7% to SEK 248 billion,
with earnings per share advancing 25% to SEK 40.20. The
share is listed on the Stockholm Stock Exchange and on
NASDAQ in the US.

Information about IFRS
As of January 1, 2005, AB Volvo complies with International Financial Reporting Standards (IFRS),
previously known as IAS, as adopted by the European Union. Figures for the corresponding periods in 2004 have been restated according to IFRS. In the financial information on pages 1 to 77
Volvo Financial Services is reported in accordance with the equity method. Reporting in accordance with IAS 1 begins with Financial information on page 86.

This report contains “forward-looking statements.” Such statements reflect management’s current expectations with respect to certain future
events and potential financial performance. Although the Company believes that the expectations reflected in such forward looking statements
are reasonable, no assurance can be given that such expectations will prove to have been correct. Such statements are subject to risk and
uncertainties and such future events and financial performance could differ materially from those set out in the forward looking statements as a
result of, among other factors, (i) changes in economic, market and competitive conditions, (ii) success of business and operating initiatives, (iii)
changes in the regulatory environment and other government actions, (iv) fluctuations in exchange rates and (v) business risk management.
This report does not imply that the company has undertaken to revise these forward-looking statements, beyond what is required under the
company’s registration contract with the Stockholm Stock Exchange if and when circumstances arise that will lead to changes compared to the
date when these statements were provided.
The Volvo Group’s formal financial reports are presented on pages 46-77 and 86-152 in the printed version and has been audited by the
company’s auditors.

A global group

The Volvo Group 2006
By creating value for
our customers, we
create value for our
shareholders

The Volvo Group is one of the leading suppliers of commercial
transport solutions providing products such as trucks,
buses, construction equipment, drive systems for marine
and industrial applications as well as aircraft engine components. The Volvo Group also offers its customers
financial services.
The Group has about 83,000 employees, production facilities
in 18 countries, and sales activities in some 180 countries.
During 2006 Volvo Group sales rose 7% to SEK 248 billion,
with earnings per share advancing 25% to SEK 40.20. The
share is listed on the Stockholm Stock Exchange and on
NASDAQ in the US.

Information about IFRS
As of January 1, 2005, AB Volvo complies with International Financial Reporting Standards (IFRS),
previously known as IAS, as adopted by the European Union. Figures for the corresponding periods in 2004 have been restated according to IFRS. In the financial information on pages 1 to 77
Volvo Financial Services is reported in accordance with the equity method. Reporting in accordance with IAS 1 begins with Financial information on page 86.

This report contains “forward-looking statements.” Such statements reflect management’s current expectations with respect to certain future
events and potential financial performance. Although the Company believes that the expectations reflected in such forward looking statements
are reasonable, no assurance can be given that such expectations will prove to have been correct. Such statements are subject to risk and
uncertainties and such future events and financial performance could differ materially from those set out in the forward looking statements as a
result of, among other factors, (i) changes in economic, market and competitive conditions, (ii) success of business and operating initiatives, (iii)
changes in the regulatory environment and other government actions, (iv) fluctuations in exchange rates and (v) business risk management.
This report does not imply that the company has undertaken to revise these forward-looking statements, beyond what is required under the
company’s registration contract with the Stockholm Stock Exchange if and when circumstances arise that will lead to changes compared to the
date when these statements were provided.
The Volvo Group’s formal financial reports are presented on pages 46-77 and 86-152 in the printed version and has been audited by the
company’s auditors.

A global group

2006
129.6 SEK bn

Volvo Group customers are active in more than
180 countries worldwide, mainly in Europe and
North America as well as to a considerable
extent in Asia. Group sales of products and

Net sales 2006
Net sales 2000

2000
66.3 SEK bn
2006
73.7 SEK bn
2000
38.2 SEK bn
2006 19.6 SEK bn

services are conducted through wholly owned

2000
8.7 SEK bn

and independent dealers. The global service
network handles customer demand for spare
parts and other services.
During 2006, the Group’s workforce rose to

2006 12.7 SEK bn

83,187 employees in 58 countries. The majority

2000
3.4 SEK bn

of employees are based in Sweden, France and
the US.
A key feature of the Volvo Group’s growth
strategy is to increase its presence in emerging
markets, primarily in Asia and Eastern Europe.
During 2006, the Group increased its sales in

2006 12.5 SEK bn

Eastern Europe by 41%. Volvo implemented

2000
4.7 SEK bn

investments in Asia during 2006 in Japan and
China. These provided a platform for increased
sales and in the long term are expected to contribute to the Group’s growth target.

Volvo Group customers are active in more than
180 countries worldwide, mainly in Europe and
North America as well as to a considerable
extent in Asia. Group sales of products and

Net sales 2006
Net sales 2000

2000
66.3 SEK bn
2006
73.7 SEK bn
2000
38.2 SEK bn
2006 19.6 SEK bn

services are conducted through wholly owned

2000
8.7 SEK bn

and independent dealers. The global service
network handles customer demand for spare
parts and other services.
During 2006, the Group’s workforce rose to

2006 12.7 SEK bn

83,187 employees in 58 countries. The majority

2000
3.4 SEK bn

of employees are based in Sweden, France and
the US.
A key feature of the Volvo Group’s growth
strategy is to increase its presence in emerging
markets, primarily in Asia and Eastern Europe.
During 2006, the Group increased its sales in

2006 12.5 SEK bn

Eastern Europe by 41%. Volvo implemented

2000
4.7 SEK bn

investments in Asia during 2006 in Japan and
China. These provided a platform for increased
sales and in the long term are expected to contribute to the Group’s growth target.

The Volvo Group 2006
Additional improvements in profitability
Record number of product innovations
Acquisitions to strengthen market position in Asia

Strong sales growth. Net sales up 7% to SEK 248,135 M (231,191).
Continuing favorable earnings trend. Earnings for the year rose 25% to
SEK 16,318 M (13,108) and the return on shareholders’ equity increased
to 19.6% (17.8).
Major investments in R&D programs for the next generation of
engines and products to ensure future competitiveness.
Consolidation of the Group’s presence in Asia as a result of the purchase
of shares in Nissan Diesel and an agreement to purchase shares in
Lingong, a Chinese manufacturer of construction equipment.
Earnings per share rose by 25% to SEK 40.20 (32.22).
Proposed dividend of SEK 25.00 per share and an extraordinary
payment through a 6:1 share split in which the sixth share will be
redeemed by AB Volvo for an amount of SEK 25 per share.

1 Excluding revaluation of shares in Scania AB and Henlys Group Plc in 2004 and excluding adjustment of goodwill in 2006.
2 Proposed dividend 2006.
3 According to the Board’s proposal.

A global group 2006

1

Organization

Business areas
Some 75 percent of the Group’s workforce of about 83,000
employees is employed in the eight product-related business
areas. Linked to these companies are a number of business
units that supply components and services to support the
Group’s business areas globally. This organizational configuration permits companies to work closely with their customers and efficiently utilize Group-wide resources.

In total, the Volvo Group
is Europe’s largest and
the world’s second largest manufacturer of
heavy trucks.

Position on world market

Number of
employees

Business units
The task of the business
units is to develop and supply components, services
and support for the
Group’s business areas.
The major business units
are Volvo Powertrain,
Volvo IT, Volvo Parts and
Volvo 3P.

Volvo 3P
2,872

Volvo Powertrain
8,274

Volvo Parts

Volvo Powertrain coordinates Volvo Group’s powertrain operations and supplies the Group’s
business areas with integrated powertrain systems comprising diesel engines, transmission systems and axles.
Volvo Parts supplies services to support the aftermarket for business areas within the Group.

403

Volvo Logistics

Volvo Information
Technology

A global group 2006

Volvo 3P is responsible for product planning, product development and for purchasing for the
Group’s truck operations.

3,575

Volvo Technology

2

35,180

Volvo Technology develops new technologies and business solutions for the Group companies.

Volvo Construction
Equipment is the world’s
largest manufacturer of
dumpers and one of the
world’s largest manufacturers of wheel loaders,
excavation equipment,
motor graders and compact construction
equipment.

Volvo Penta is the
world’s largest producer
of diesel engines for
leisure boats.

Volvo Aero holds a leading position as an independent producer, with
engine components in
about 90% of all large
commercial aircraft
delivered in 2006.

Financial Services cooperates closely with the
other business areas to
strengthen the Group’s
competitiveness.

11,049

1,652

3,505

1,139

7,762

A global group 2006

3

Volvo in society
The Volvo Group is one of the worldâ&#x20AC;&#x2122;s leading
suppliers of commercial transport solutions.
Our trucks, buses, construction equipment,
marine and industrial drive systems and components and services for the aviation sector are
important parts of the worldâ&#x20AC;&#x2122;s transportation
networks, which are in operation 24 hours a
day, every day, throughout the year.

A truck must be capable of fulfilling important transportation services 24 hours a day. It is a link in the distribution chain, ensuring that society is provided with everything that is needed during the working day. Thatâ&#x20AC;&#x2122;s why
Volvo Group trucks are an everyday sight as they go
about their distribution services in urban traffic.

The demands placed on trucks and truck transports are
high, regardless of whether they apply to heavy truckdriving operations in remote forest areas, or long-distance transportation of fast-moving consumer goods.
High efficiency and low costs are vital factors, while
safety, ergonomics and environmental considerations
are also assigned top priority.

4

A global group 2006

Demands for availability and rapid transports are
increasing continuously. Volvo Aero’s many years of
experience and leading-edge competencies in the field
of aircraft engine components enable its customers to
focus on their own core businesses – namely to provide
optimally effective transport services.

Volvo Penta is best known for its boat engines and
marine drive systems. But the company also delivers
drive systems for a wide range of other applications,
such as generator units for use at airports and hospitals,
irrigation plants and engines for use in forklift and warehouse trucks.

Volvo Construction Equipment’s yellow machines are used in
work conducted in the most demanding environments and at
every conceivable type of construction site – ranging from
new highways, bridges and shopping malls to ditch digging
and the transportation of materials in areas where there simply are no roads. These machines are also used within the
forest industry and the materials handling sector.

A global group 2006

5

Vision, mission and values

Our vision
The Volvo Group’s vision is to be valued as the world’s leading supplier of commercial
transport solutions.

Volvo Group’s mission
By creating value for our customers, we create value for our shareholders.
We use our expertise to create transport-related products and services of superior
quality, safety and environmental care for demanding customers in selected segments.
We work with energy, passion and respect for the individual.

Our values
The Volvo Group views its corporate culture as a unique asset, since it is difficult for
competitors to copy. By applying and strengthening the expertise and culture we
have built up over the years, we can achieve our vision.
Quality, safety and environmental care are the values that form the Volvo Group’s
common base and are important components of our corporate culture. The values
have a long tradition and permeate our organization, our products and our way of
working. Our goal is to maintain a leading position in these areas.

6

A global group 2006

Quality

Safety

Environmental care

Quality is an expression of our goal to offer reli-

Safety is concerned with how our products are

We believe that it is self-evident that our prod-

able products and services. In all aspects of our

used in society. We have had a leading position

ucts and our operations shall have the lowest

operations, from product development and

in issues regarding safety for a long time; our

possible adverse impact on the environment.

production, to delivery and customer support,

goal is to maintain this position. A focus on

We are working to further improve energy effi-

the focus shall be on customersâ&#x20AC;&#x2122; needs and

safety is an integral part of our product devel-

ciency and to reduce emissions in all aspects of

expectations. Our goal is to exceed their expect-

opment work. Our employees are highly aware

our business, with particular focus on the use of

ations. With a customer focus based on every-

of safety issues, and the knowledge gained

our products. Our goal is that the Volvo Group

oneâ&#x20AC;&#x2122;s commitment and participation, combined

from our internal crash investigations is applied

shall be ranked as a leader in environmental

with a process culture, our aim is to be number

in product development. Our goal is to reduce

care. To achieve this goal, we strive for a holistic

one in customer satisfaction. This is based on a

the risk of accidents and mitigate the conse-

view, continuous improvement, technical devel-

culture in which all employees are responsive

quences of any accidents that may occur, as

opment and efficient resource utilization.

and aware of what must be accomplished to be

well as to improve safety and the work environ-

the best business partner.

ment for the drivers of our vehicles and equipment.

A global group 2006

7

Market overview
Global economic trend
The global economy continues to register solid growth. In recent years,
global GDP growth has ranged from 4 percent to 5 percent, the highest
level since the 1970s. The positive trend is evident in most global regions
but is particularly noticeable in China, Eastern Europe and other emerging
markets.
Nowadays, these growth markets account for a substantial share of the
world economy and represent an increasingly integral part of the global
production system with their extensive trade. Their share of overall global
exports is currently 40 percent, compared with 20 percent in the 1970s.
Transport requirements
Social developments worldwide are fuelling an expansion in trade, locally as
well as among regions and continents. The growth in trade is creating higher
transport requirements, both for goods and people.
Transport vehicle requirements are cyclical but the industry has an underlying growth rate of about 4 percent annually in mature markets over a business cycle. In growth regions such as Asia and Eastern Europe, the growth
rate is considerably higher.
Commodity prices
Rapid growth in global economy has resulted in high demand for energy. Oil
prices have risen sharply in recent years, with a peak price of USD 75 per
barrel in summer 2006. Prices levels have fallen since then, reaching about
USD 59 per barrel at year-end 2006. While at the same time that there is a
high demand for energy, the supply is limited, due partly to the political
unrest in the Middle East, which affects prices. The prices of raw material
to industry, such as metals and rubber, also rose during the year.
Fuel costs are a significant part of the operating cost for many of Volvo
Groupâ&#x20AC;&#x2122;s customers. Generally, Volvo Group customers have proven skillful in
offsetting fuel costs.

Growth in USA and Europe, %

02
1.6
0.9

8

A global group 2006

03 04
2.5 3.9
0.8 1.7

05 06
3.2 3.3
1.4 2.7

Growth in Asia and China, %

USA

Asia

Europe

China

Annual GDP growth.

Annual GDP growth.

Source: Consensus
Economics

Source: Consensus
Economics

02 03 04 05 06
3.6 4.6 5.1 4.8 5.0
9.1 10.0 10.1 10.2 10.6

An industry in flux
The transport industry is moving through a process of change in which
increasingly stringent environmental standards are a major driving force.
Substantial investments are required for R&D programs involving new technologies to reduce emissions from vehicles and for the development of
alternative fuels and drivelines. To meet these challenges, consolidation is
in progress among manufacturers through mergers and acquisitions.
In mature markets in the US and Europe, consolidation in the truck industry has been in progress over a number of decades and has made substantial progress. In other regions or sectors – such as Asia or the construction
industry – the pressure to consolidate is expected to increase.
Meanwhile, new competitors have emerged as major regional players in
growth markets with the aim of becoming global players. Restructuring
creates the potential for the Volvo Group to further strengthen its positions
in each business area by means of acquisitions.
Growth markets
The Volvo Group’s goal is to be the world’s leading supplier of commercial
transport solutions. Volvo currently has well-established positions in the
European and North American markets. However, the most rapid growth is
occurring in regions in which the Group had very limited operations ten or 15
years ago. The Volvo Group plans to expand in these markets – in Asia, for
example.
China and India are examples of markets that are already considerably
large and will prove even more important for the Volvo Group’s future growth.
In addition, Eastern European markets are showing steep growth and the
Group is well positioned to capitalize on expansion in these markets.

CEO comment
2006 was an exam year for our strategy. A new generation of
products would be on the market, developed and produced in a
new industrial structure. The new engines would have to meet
the dramatically more stringent emission standards in Europe, the
US and Japan. As we had anticipated, it was an industrious year
– and a great success. 2006 was a record year.

decided to raise the Group’s financial targets.
We are now aiming at an average operating
margin of more than 7 percent over a business
cycle, adding also another, currently, one percentage point from the financing operations.
The growth target of 10 percent annually is
retained.
Aggressive strategy for growth
The strategy to reach the growth target is to
grow geographically and at the same time

Challenging assignment

scheduled and although they increased costs

broaden our offering to customers. We expect
organic growth of 5–6 percent and to obtain

>>> Already at the acquistion of Renault Trucks

temporarily our new products rolled out in a

and Mack six years ago, we knew that the road

proper manner. The Group is now well consoli-

the remaining percent through acquisitions. In

ahead was going to be challenging. We faced

dated and our own as well as independent deal-

line with this, the Board has sought a distinct

the integration of thousands of employees into

ers have a highly positive development.

balance between the need for financial free-

duction systems for engines to one common

Successful products

an attractive level for annual share dividends.

system, shrinking the engine families from 18

The solid order bookings at the end of 2006

Geographically, we are targeting the fast-

to two and coordinating the truck companies’

and beginning of 2007 demonstrate the

growing economies in Eastern Europe and Asia.

dom of action for long-term value growth and

new units, changing from three different pro-

purchasing, product planning and product

strength of the new product generation. The

The economies in Eastern Europe are in a

development in a new unit. In addition, the units

diesel engines are leading in fuel efficiency

very dynamic phase and new transport patterns

for IT, logistics and spare parts were assigned

and provide competitive advantages for all of

are being established. For many years we have

to take a Group-wide lead for coordination

the Group’s vehicles and equipment. As a result

been active in this region extending the dealer

within their areas. All these actions were aimed

of the more efficient structure, we have been

network and services. This is now bearing fruit.

at gaining maximum benefit from the technical

able to free up resources to develop more

The nearly 40 percent sales increase during

resources and our combined volumes.

customer-adapted variants, which further

2006 is evidence that we are taking a share of

strengthen positions. As a result of the

the rapid economic growth.

We also had aggressive plans to strengthen
and expand the dealer network to provide bet-

increased benefits for the customer, we have

ter service to customers and advance our pos-

been able to price our vehicles, equipment and

Major potential in Asia

itions on new markets.

services at the right levels.

Since the quality and emissions standards in
countries such as China and India are still rela-

New and more efficient structure

Group-wide production

tively low, the challenge in these countries is

Accordingly, there were many reasons for con-

The changes implemented are not solely sig-

greater. Pricing is different and local manufac-

cern at the beginning of 2006. We had never

nificant structurally, but also important for the

turing is a necessity for competing with domes-

previously implemented such a comprehensive

internal transfer of know-how. Increased coor-

tic producers. However, in the long term we see

product renewal. We phased in new production

dination and common technical solutions have

the greatest potential for growth in Asia.

systems at the same time as we phased out the

resulted in improved quality. Step by step we

A favorable sign for the environment and our

old. This was in a booming business climate,

are developing a Group-wide production

development is China’s ambition to establish

with plants operating at peak capacity.

method based on standardization, best prac-

more stringent emission standards.

Concurrently, we put time and resources into

tice and a common corporate culture.
Raised financial targets

mental demands, which strengthens our pos-

ceeded in realizing our plans. In all significant

Since the changes yield effects in the form of a

ition since we have gone further than the com-

respects, we carried out the changeovers as

structurally higher profitability, the Board

petition in developing a global product program.

Naturally, we are very proud that we suc-

10

In general, we foresee an increasing global
harmonization of technical as well as environ-

the investments in Asia and Eastern Europe.

A global group 2006

With investments in India and China, we aim to

An important part of our strategy for

share in their growing economies, in the man-

increased profitability is the growth of ser-

ner that we are now experiencing in Eastern

vices, accessories and spare parts.

Europe.
New technology for a better
New phase in Asia

environment

In order to strengthen our position in Asia, we

As a vehicle manufacturer, we have

have taken several steps of significant strate-

major responsibility for the en-

gic importance. Within the truck segment, we

vironment and to contribute to a

established a strategic alliance with Japanese

sustainable society. We view this

Nissan Diesel. To start with, we acquired a 19

responsibility with the greatest

percent holding in Nissan Diesel and in Fe-

seriousness. We have set very

bruary, 2007, we made a public offer for the

high goals to reduce energy con-

whole company.

sumption in production and to

Nissan Diesel holds a solid position in Japan
and the rest of Asia. A merger would give

make more of our plants carbondioxide neutral. In the midst of this tough

advantages within product development and

period I have described, we have also inten-

purchasing as well as within the production of

sified the development of alternative drive-

engines and drivelines. Gains also arise in that

lines to reduce fuel consumption and the

the companies are given access to each otherâ&#x20AC;&#x2122;s

emission of greenhouse gases. Among

dealer and service networks.

other activities, we presented our fuel-

The cooperation with Nissan Diesel has also
resulted in more in-depth discussions about

efficient hybrid technology in 2006, which
we plan to have in production in 2009.

future coordination with Chinaâ&#x20AC;&#x2122;s largest truck
manufacturer, Dongfeng Motors.
In China we have also entered an exciting

Successful integration work
I wish to thank all employees for an excel-

new phase through the purchase of 70 percent

lent job. In my opinion, and that of the Board, we

of the Chinese wheel loader manufacturer

have succeeded well with the difficult task of

Lingong. As the first foreign manufacturer of

integrating new companies and implementing

construction equipment, we gain a base with a

structural changes. This is thanks to our hard

nationwide dealer network in China.

work each day in an organization that has performed in a disciplined and motivated manner.

Broader offering to
customers

2007 will be an exciting year during which
we will have the entire new product generation

Parallel with investments on new markets, we

on the market and take new strides in the

are increasing efforts to expand our offering of

expansion eastward.

services, accessories and spare parts. We view
this as our greatest possibility to create longterm growth in established markets. In this
respect, we are working with intensifying cooperation with customers to develop broader
business solutions. Customer financing is an

Leif Johansson

important component in this respect and for

President and CEO

expansion in markets with a less developed
credit system.

A global group 2006

11

Our customers’ needs govern our strategy…
The Volvo Group’s customers mainly conduct transport-related operations.
They impose rigorous requirements on both products and services. In a
competitive market, customer satisfaction is a key factor, since it assures
future sales and is essential for healthy profitability.
Developing and broadening cooperation with customers
Close cooperation with customers is decisive for enabling the Volvo Group
to better understand their needs and meet their expectations with the right
products and services.
Quality in the Volvo Group’s offering is also linked to how customers are
treated and how services are performed. While product characteristics and
quality are of key importance, it is above all the people in the Volvo Group,
and their skills, values, attitudes and conduct, which create success.
The Group must constantly be able to offer customers the solutions that
are best commercially for their operations. At the same time, customers’
experience of the brands should be consistent and in line with the Group’s
basic values. This applies both within the Group and at dealerships.
Accordingly, the Volvo Group works continuously to develop its dealership
The foremost argument for CocaCola in selecting Volvo in the early
‘90s was the extensive Volvo service network. Volvo still has the
most widespread service network
of all foreign truck manufacturers
operating on the Russian market
today.

network with the aim of further improving its service to customers.
Building strong relations with key customers
The Volvo Group strives to forge closer relations with key customers. There
are several advantages; the Group can support customers’ growth even
more effectively than before, while simultaneously helping to broaden the
offering of products and services to existing customers. In this way, the
Volvo Group can benefit from its broad range of products and services and
establish synergies with key customers.

12

A global group 2006

1

Profitable growth
Since 2001, the Volvo Group has had an average annual growth rate of
7 percent, which has been achieved through both organic growth and acquisitions. The Volvo Group’s objective is to continue growing with focus on
profitability. The growth target is 10 percent annually over a business cycle,
which will be achieved through organic growth and through acquisitions at
approximately equal proportions.
Expanding geographic coverage and product offering
The Volvo Group holds established positions in markets in Europe and North
America. Today, however, the most rapid growth is occurring in markets
where the Group had very little business only ten to 15 years ago. In growth
markets, a stronger position and increased market shares are to be achieved
by attracting new customers and through strategic alliances. The Group is
making large investments in the dealer and service networks and concurrently carrying out a number of acquisitions. The aim is for markets outside
Europe and North America, such as India, Japan, China and Russia, to

10%

account for a substantial portion of the Group’s total sales in the long term.
The aim in established markets is for an expanded customer offering,
with an increased proportion of sales in the aftermarket and a high proportion of services to contribute to achieving the growth target. Strong brands
increase customers’ trust and create loyalty to the Group’s products and

Volvo’s aim is to grow by 10 percent annually. Growth will be
achieved organically as well as
through acquisitions.

services, thereby supporting profitable long-term growth.
Activities during a business cycle
The sectors in which the Volvo Group operates are exposed to economic
fluctuations. The Volvo Group endeavors to actively handle both upswings
and downturns in each sector to achieve better profitability. The strategy of
developing aftermarket services and growing in new markets enables the
Group to achieve a more favorable balance between all the phases of a business cycle.

A global group 2006

13

2

Innovation and product development
Renewal and concept development
Development of innovative technology is the key to success for new generations of products, and to maintaining market-leading positions in the future.
Efforts are constantly under way within the Group to improve the performance of products and thereby strengthen competitiveness. At the
same time, research looking even further into the future is conducted in
order to achieve new technical breakthroughs.
The Volvo Group cooperates worldwide with a large number of external
partners in projects and forums that allow experience to be exchanged and
contact to be made with cutting-edge technologies and innovations. The
Volvo Group will continue to actively exchange information with many different players, such as universities, research institutes, customers, suppliers
and government authorities.
Providing a complete, customer-oriented offering
For a global organization such as the Volvo Group, product planning must
ensure that the right products with the right specifications are offered in the
right markets. Accordingly, products typically offer an extensive range of
customer adaptations. Product adaptation supports the distinctive features
of each brand and its competitive advantages as seen from the customerâ&#x20AC;&#x2122;s
perspective.
Improving fuel efficiency and increasing the use
of alternative fuels

Product development has to be
based on requirements from the
customers. Volvo CE invites selected customers at an early stage
when new products are to be
designed. Customers give the
company valuable feedback on
what needs they have and what
features should be included in
coming products.

14

A global group 2006

It is a major challenge to create a sustainable society that does not jeopardize the environment for future generations. The Volvo Group is a driving
force within the transport industry in such areas as energy and the environment. This undertaking seeks to attain a gradual transition from fossil fuels,
such as oil and natural gas, to fuels from renewable sources and hybrid drive
systems.

3

Highest quality in implementation
Enhancing productivity and cost-efficiency
The Volvo Group strives to continuously optimize cost-efficiency and productivity in all parts of its operations. This contributes to increased profitability and improves the Group’s capacity to handle economic fluctuations.
Part of the internal cost-efficiency work involves reducing production
costs and the costs for sales and administration. Product costs must be
constantly scrutinized and kept to a minimum to generate competitiveness
without compromising on quality.
The Volvo Group strives to be characterized by the highest quality. Getting
it right from the start increases customer satisfaction, keeps costs down
and saves time and energy.
The Volvo Group plans to continue with the introduction of the Volvo
Production System (VPS), which was designed to establish common production processes throughout the Group. VPS increases flexibility and efficiency in the industrial organization. It is also expected that VPS will create
value for customers through improved quality, more reliable deliveries and
reduced costs.
Execution in focus
A key competitive advantage in the commercial transport sector is the
capacity to be efficient and suited to purpose. The Volvo Group’s capacity to
handle development projects, combined with its ability to rapidly introduce
processes for new ways of working, contributes to improved results.
Maintaining expertise
The Volvo Group is growing in new geographic markets and developing new
technology, as well as meeting a number of demographic challenges. It is

We work continuously with our
processes with the aim to increase
quality and to optimize manufacturing.

therefore vital to develop the appropriate expertise to assure the Group’s
future competitiveness.
Diversity is a commercial driving force and a source of international competitiveness and hence profitability. The Volvo Group is increasing its efforts
to benefit from the strength that stems from diversity in terms of gender,
age, ethnic background and education, among other areas.
The quality of leadership is another key success factor for the Volvo
Group’s capacity to generate future business.

New financial targets
• Growth in net sales should increase by at
least 10 percent annually.
• Operating margin should exceed 7 percent
for for the Group’s industrial operations over
the business cycle.
• Net debt should be a maximum of 40 percent
of shareholders’ equity.

organization featuring business units with

Financial strategy

The growth target of 10 percent annually will be

Group-wide responsibility for engines and

The purpose of Volvo’s long-term financial

achieved through organic growth and through

product development, purchasing and product

strategy is to ensure the best use of Group

acquisitions at approximately equal propor-

planning has fuelled in-house efficiency pro-

funds in providing shareholders with a favor-

tions.

grams and ensured the realization of the con-

able return and offering creditors reliable

siderable potential synergies. These targeted

security.

The Volvo Group’s new profitability target is
that operating margin is to exceed 7 percent

efforts have created business areas that indi-

However, a prerequisite for the long-term

annually over a business cycle. The target cov-

vidually have strong positions in their particular

competitive development of the company is

ers all Group operations, except Financial

markets, while simultaneously capitalizing fully

the availability of sufficient financial resources

Services, which currently contributes approxi-

on the potential offered for coordination and

to secure investments and active participation

mately one additional percentage point.

cooperation deriving from the dramatically

in industry consolidation worldwide, thereby

The Volvo Group’s capital is intended primar-

higher volumes of engines and other products.

maintaining a strategically competitive pos-

ily for the financing of acquisitions, and for

ition in all business areas.

maintaining a high level of financial flexibility,

Overall, the Volvo Group’s new composition
has led to structurally higher margins and

The Volvo Group’s financial resources will

any surplus capital will then be transferred to

stronger cash-flow. Higher earnings have led

be used for investments, acquisitions and a

Volvo’s shareholders. The limiting level of net

to a sharp increase in dividends in recent years,

competitive dividend with a stable and long-

debt to a maximum of 40 percent should mainly

while also creating resources that have been

term development. Any surplus capital will be

be regarded as a reserve that can be used in

used for product development, geographic

transferred to the shareholders.

the event of a major acquisition.
The financial resources of the Group must
be used as efficiently as possible to ensure and
further strengthen the profitability within the

16

A global group 2006

Group and thereby securing the return of equity

amounted to approximately SEK 84 billion and

to the shareholders. This is particularly impor-

the equity ratio was 11.5 percent.

Volvo has received an A3 credit rating from

tant since the Volvo Group operates in a cyclical industry, which is also in a consolidation

helping to create future value for shareholders.
It is not enough to manufacture and sell
high-quality products to realize the Volvo
Group’s vision of being the world leader in
commercial transport solutions. Many customers expect complete transport solutions, which
creates a need to be able to offer various services, accessories and spare parts to support

Products

key products.
Vehicles and equipment

The Volvo Group is the world’s largest manufacturer of heavy-duty diesel engines for commercial use and also a significant manufacturer
of drivelines for heavy vehicles. The Group has
manufacturing, research and development
facilities for drivelines on three continents and
its products are offered in more than 180 markets around the world.
Drivelines are designed so that they can be
adapted a large number of applications in most
of the Group’s products. Diesel engines are
used in trucks, buses and construction equipment as well as in boats and industrial applications such as, for example, generator sets.
The strongest driving force to development
of drivelines is customers’ needs and requests.
The new Renault Midlum and Renault
Premium Distribution
New Renault Midlum and Renault Premium Distri–
bution vehicles were launched in 2006. These latest
models feature the new 5- and 7-liter engines
(Renault Midlum) as well as 7- and 11-liter engines
(Renault Premium Distribution), which comply with
Euro 4 emission requirements. Certain models are
also prepared for the Euro 5 standard, which
will come into effect in 2009.

18

A global group 2006

World premier for Volvo 7700
The new version of the Volvo 7700 city bus was
unveiled in June 2006. The major innovation in the
Volvo 7700 is the switch from a 7-liter to a 9-liter
engine, which is available in both diesel and gas versions. As a result of Volvo selecting SCR catalyzer
technology, Volvo Buses can now offer customers an
engine that meets both the Euro 4 and Euro 5 standards, while also cutting fuel consumption.

Volvo Group’s hybrid technology for heavy
vehicles and machinery
At the beginning of the year, the Volvo Group presented a new, efficient hybrid solution for heavy
vehicles. The Volvo Group’s hybrid technology offers
the largest fuel savings on stretches involving considerable braking and acceleration, as in the case of
city buses, city distribution operations, refuse applications and construction work. Fuel savings are up
to 35% in these applications.

Products that feature reliability, durability, driv-

Today, soft products account for a significant

ability and fuel economy help to increase cus-

share of the Group’s total sales and is expected

tomers’ profitability and productivity. The

to grow further in the years ahead.

Group’s goal is to exceed customer expectations at a lower price than the competitors.
Accessories, spare parts and
services

Accessories,
spare parts
and
services

The Volvo Group’s vision is to be the world
leader of commercial transport solutions.
Most transports require, in addition to the
vehicle, a number of accessories or services to
carry out specific transport assignments in the
best way. This is where the Volvo Group’s wide
selection of accessories, spare parts and services, or soft products, enter the picture.
This selection of services includes a range of
financing solutions, rental services, used trucks,
service contracts and IT services.
Because the accessories, spare parts and
services businesses predominately belong to
the aftermarket, these serve to balance fluctuation in the economy. By increasing the selection of soft products, the Group’s profitability is
increased throughout the entire business
cycle.
The strategy of increasing sales of accessories, spare parts and services is also important
for reaching the Volvo Group’s profitability and
growth targets, particularly in mature markets.

Financing

Services

Accessories

Financial solutions are vital to the Volvo Group. The
customer offering includes traditional financial services such as installment contracts, operating and
financial leasing and dealer financing.

Volvo Trucks has in the recent years developed its
retail network in Europe through the wholly-owned
Volvo Truck Centers. This is an important part of the
company’s strategy to work closer with the customers
and hereby be able to be more efficient when it comes
to distribution, service and marketing.

Customers are offered a wide range of accessories.
Volvo’s wheel loader, for example, can be fitted with
a number of different tools to help with various
tasks.

A global group 2006

19

INTERVIEW

However, crucial to our success is
that we must successfully continue
developing the intellectual capital
and stimulate exchange of thoughts
and ideas.
Torbjรถrn Holmstrรถm, President, Volvo 3P

20

A global group 2006

&

DEVELOPMENT

SYNERGIES

Volvo 3P in brief

Volvo 3P is a business unit responsible for product
planning, product development and purchasing for
the three truck companies, Volvo Trucks, Mack
Trucks and Renault Trucks.

is unknown to most people outside the Group.
Volvo 3P combines development

means that Volvo 3P must produce improved

In a newspaper, Volvo 3P was described

products at lower costs than in the past. And,

as probably the most unknown business

there is a great deal of cost savings to be made.

unit of the Volvo Group. And Torbjörn

Each year, Volvo 3P and Volvo Powertrain make

Holmström, who has been the President

purchases for nearly SEK 70 billion and the

of Volvo 3P since 2003, has no objec-

Volvo Group invests about SEK 8 billion in

tions to that. “Volvo Trucks, Renault

Torbjörn Holmström
Torbjörn Holmström, born in 1955, has been the
President of Volvo 3P since 2003. Between 1999
and 2003, he was an executive at Volvo Powertrain.
During the first two years, he was responsible for
transmission development and the last two years for
driveline development. He has held other executive
positions at Volvo Powertrain and was responsible for
drivelines at Volvo do Brasil. Torbjörn Holmström
received an engineering degree from Chalmers
University of Technology in 1979.

The mission is to produce synergies and
industrial efficiency. In daily numbers, this

research and development.

Trucks and Mack Trucks are natur-

“The Volvo Group saved a total of SEK 3.8

ally the ones that should be vis-

billion already two years after the acquisitions

ible externally, but it could be

of Renault Trucks and Mack Trucks. With regard

said that we are the cement or even

to Volvo 3P, profits to date were primarily from

the soul in the collaboration between the three

purchasing, but we estimate that jointly with

truck brands,” says Torbjörn.

Volvo Powertrain we will contribute a similar

Volvo 3P is namely responsible for several

amount in 2006 and 2007, as the new trucks

significant areas, which are not always visible to

are introduced. The new trucks contain several

customers, shareholders or other stakehold-

more components and systems that were

ers, but which are significantly important to the

developed and purchased jointly,” explains

Group’s profitability. The areas of responsibility

Torbjörn Holmström.

A global group 2006

21

&

INTERVIEW

DEVELOPMENT

SYNERGIES
Efficient product development

horizon. This is to ensure that the Group has the

further, due to the fact that the Volvo Group has

In terms of the number of employees, product

correct products in the long term and to coord–

such a high volume of important components

development is Volvo 3P’s largest area. Nearly

inate technology and components between

that major suppliers want to cooperate and are

2,300 employees work in close collaboration

truck brands.

with the three truck brands and Volvo

are likely to increase, since the Volvo Group and

Powertrain. Volvo 3P concentrates on chassis,

products and a ten-year plan for technology

Nissan Diesel have commenced purchasing

cabs and electrical systems, while Volvo

development. But the plans are not written in

cooperation.

Powertrain works on the driveline, meaning the

stone, they are adapted each year to changes

engine, gearbox and the rear axle.

in the Volvo Group and the environment. There

Global organization

The work is based on common architecture

is a list of what the Group would like to imple-

Volvo 3P’s head office and global development

and shared technology between the truck

ment and it is a question of distributing re-

center is located in bright, airy premises adja-

companies. This offers many advantages.

sources to the correct projects,” says Torbjörn

cent to the Volvo Trucks plant in Lundby,

Resources such as expertise, time and capital

Holmström.

Göteborg, but the organization is global with

a difficult technical problem, instead of distrib-

Bulk purchasing generates lower costs

ants in eight offices on five continents.

uting resources for three different alternatives.

To date, purchasing is the area in which coordi-

“It is important to be established in close prox-

This strengthens the motivation to invest

nation gains have been most significant. The

imity to truck operations,” stresses Torbjörn

can be combined to produce a joint solution to

more than 2,900 employees and 600 consult-

resources in developing optimum solutions for

Volvo Group has considerable size and pur-

Holmström. He believes that it is also crucial

each truck model based on the customer’s

chasing power when negotiating purchasing

that information and knowledge are exchanged

requirements.

contracts with suppliers. In the past year, the

freely between the various countries.

“A truck contains a large number of compon-

focus was on the significant increases in the

“We have taken the best expertise in terms

ents that are common in all trucks and this

prices of raw materials such as steel and other

of development of various truck types from the

applies to the driveline as well as the work we

metals, rubber and plastic.

three truck companies and important ingredi-

do. This produces improved quality and lower

Torbjörn Holmström feels that by implement-

costs, which is advantageous to our customers.

ing global purchasing and larger volumes, price

Development resources are also released to

increases were handled in a satisfactory man-

And, the one thing he would like to specific-

develop truck models that are even more opti-

ner. He also stated that in the past years pur-

ally highlight is the company culture, in which

mized for different types of transports, by

chasing was concentrated to fewer strategic

nothing is regarded as an obstacle, but instead

adapting solutions to each brand core seg-

suppliers.

ents such as quality and cost efficiency and

assistance and support is provided to each

learned from each other.”

ment. It is vital to remember that Volvo 3P is

An increased portion of joint technology and

other to jointly create solutions that contribute

there to strengthen each brand, not to dilute it,”

components also means positive effects in

to strengthening the position of the Volvo

terms of purchasing, in which one selected

Group.

says Torbjörn Holmström.
This is why there are distinct definitions for

supplier receives increased volume base, which

the souls of the different brands, in terms of

results in lower production costs and improved

appearance, cabs, interior fittings, engines and

coverage of development costs.

What are the major challenges facing Volvo
3P?
“The simple response would be to point to all

Volvo Powertrain is the world’s largest producer
of heavy diesel engines in the 9–18 liter classes.
The business unit coordinates Volvo’s powertrain
operations and supplies the Volvo Group’s
business areas with integrated powertrain
systems comprising diesel engines, transmissions
and driveshafts.
Volvo Powertrain has 8,274 employees, including
5,677 in production and 2,597 in product development and administration.

POWER
It was a hectic year for Volvo Powertrain. The
strategies and plans that were adopted after
the acquisition of Renault Trucks and Mack
Trucks were followed through.
Volvo Powertrain – the Group’s engine
The Group now has common engine platforms
that fulfill the latest environmental requirements, a more focused research and development program, more efficient production and a
more focused supplier structure.
“If Volvo 3P is the soul in the cooperation
between the business areas, then we are the
heart,” says Lars-Göran Moberg, President of
Volvo Powertrain. “Our task is to ensure that
good drivelines are available for Volvo Trucks,
Mack

Trucks,

Renault

Trucks,

Buses,

Construction Equipment and Volvo Penta.”
It sounds self-evident when Lars-Göran
Moberg says it, but it is no small undertaking to
be the driveline supplier for the Volvo Group,

24

A global group 2006

Jessica Sandstrรถm, who is in charge of ongoing
hybrid-development projects at Volvo Powertrain,
talks to Lars-Gรถran Moberg, President.

A global group 2006

25

INTERVIEW

UNIFORM

POWER

the world’s second largest company in its sec-

The new platforms will further increase

tor. Similarly, it was no small task to reorganize

economies of scale, since the Volvo Group

the entire operation, while simultaneously

works with a common architecture and shared

delivering annual volumes amounting to

technology. But Lars-Göran Moberg empha-

200,000 engines and 80,000 gearboxes.

sizes that, despite this, the range of choices for

“We are the world’s largest producer of heavy

Lars-Göran Moberg, born 1943, holds a Masters
degree in Engineering and has been President of
Volvo Powertrain since 2001. He is also Board
Chairman of Volvo 3P and Volvo Technology and
Technical Director of AB Volvo. He has worked for
Volvo since 1995 and has been a member of
Volvo’s Group Executive Committee since 2001.

customers is larger than before.

diesel engines, from 9 liters up to 18 liters. Our

The Volvo Group’s engine offering is one of

aim is to lead development in terms of perform-

the broadest in the market, and engines are

ance, quality and environmental characteris-

adapted to the size of vehicles, what type of

tics, and to deliver our products at competitive

transport work they will be doing, as well as the

prices, ” explains Lars-Göran Moberg.

environment in which the product is to operate.

The driveline, which consists of the engine,

“We develop and produce engines with differ-

gearbox and the driveshaft or driveshafts, is

ent characteristics, but based on common archi-

often described as the heart of a vehicle. Volvo

tecture and shared technology. The truck brands

Powertrain is responsible for the development

will always retain their distinctive brand identity,

years ago to slightly more than 80 today. Those

and production of heavy engines, gearboxes

and the same applies to the engines. The most

that have been selected now have the capacity

and driveshafts. The business unit is also

important point for the customers is that we

to participate more actively in the development
process.

purchasing – from nearly 700 suppliers a few

responsible for ensuring that the Volvo Group is

produce drivelines that are optimized for the

supplied with medium-heavy engines, which

transport work to be done by the specific ve-

“It should also be borne in mind that we

come from partner company Deutz, in which

hicle, combined with lower fuel consumption

implemented all these changes and develop-

and better operating characteristics. As a result

ment projects at the same time as we were inte-

the Volvo Group holds 7 percent interest.
Powertrain is also a substantial manufac-

of the common engine strategy, Volvo Con-

grating three formerly separate powertrain div-

turer of heavy gearboxes in-house, with pro-

struction Equipment and Volvo Penta also have

isions,” says Lars-Göran Moberg. “Today, we

duction in Köping, Sweden and Hagerstown,

a solid competitive advantage with regards to

are a global organization with a coordinated

Maryland, in the US. Extensive efforts have also

forthcoming emissions standards,” says Lars-

industrial structure, a common supplier struc-

been made in this area to standardize develop-

Göran Moberg.

ture and common platforms. Now we must make
sure that we get the maximum out of the new

ment, purchasing and manufacturing, while

product range and the new industrial system.”

concurrently broadening the customer offer-

Several advantages

ing. Since its introduction in 2002, Volvo’s

The Volvo Group’s structure, with a common

internally produced AMT gearbox has grown

business unit for the development, production

Emissions requirements one

rapidly in volume at the cost of manual gear-

and purchase of drivelines, has several advan-

of the challenges

boxes. In practice, it is the industry standard in

tages. Volvo Powertrain has concentrated its

Lars-Göran Moberg identifies tougher emis-

Europe and was recently launched in North

expertise in research and development to spe-

sions legislation and changed customer re-

America.

cialized units in Sweden, France, the US and

quirements as future challenges.

Brazil. The division of labor is clear and there is

Lower fuel consumption is becoming in-

Common engine platforms

extensive cooperation between the units. The

creasingly important both from an environmen-

To date, increased volumes have been the driv-

joint focus on a platform creates synergies and

tal viewpoint and from a commercial perspec-

ing force for profitability at Volvo Powertrain.

resources that help to improve the driveline’s

tive, with fuel accounting for an increasingly

The decision to work toward two platforms is

performance and cost-efficiency.

large proportion of operating costs. There are

The production structure has also been

several key steps along the way toward cleaner

area in the future, although the strategy gave

overhauled. Previously there were three differ-

engines for trucks and buses. The Euro 4 stand-

rise to costs during 2006 for both the new and

ent industrial systems. Now there is a single

ard was introduced in October 2006, and Euro 5

the old generation of engines, since both were

common system designed to achieve econ-

is planned for 2009. On January 1, 2007, the

being produced in parallel for a while.

omies of scale, high quality and delivery reli-

US’07 standard came into force in the US. The

aimed at further strengthening the business

“We see considerable advantages in the

ability, within which the four sister plants in

standard drastically reduces emissions levels

increased volumes and the concentration to

Göteborg, Lyon, Hagerstown and Curitiba sup-

compared with only a year ago. A final step

two platforms regarding costs for quality and

ply their local markets with heavy engines and

towards near zero emissions will be taken when

heavy gearboxes.

US’10 and Euro 6 will come into force in 2010

delivery precision,” says Lars-Göran Moberg.

Volvo Powertrain has also concentrated its
26

Lars-Göran Moberg

A global group 2006

and 2012/2013 respectively, according to plan.

More stringent emissions regulations are
also gradually being introduced for offroad vehicles and marine applications. For
off-road vehicles the Tier 3 regulations are currently being introduced and the next major step
will be Tier 4, which comes into effect in 2011.
Alternative fuels and drivelines
The Volvo Group is working on parallel programs to meet environmental requirements
and reduce the need for fossil fuels. One program aims to make engines run more efficiently
on today’s fuels, while another is focusing on

18

finding alternative fuels. It is not a major problem to optimize diesel engines to operate on
other fuels. Rather, the problem is to produce
sufficient volumes of fuel and to distribute it. A
third program is focusing on alternative drivelines to complement diesel engines – hybrid
drivelines, for example.
“We have made considerable progress in

Common engine platforms

2

hybrid technology, and during 2006 we pre-

In 2001, the Volvo Group had 18 different

Euro 6 standards, and to introduce the most

sented a hybrid solution for heavy vehicles that

engine platforms ranging from 4 liters to 16

advanced technology possible to enhance qual-

gives fuel savings of up to 35 percent,” says

liters. The company knew that environmental

ity, operating economy, fuel efficiency and per-

Jessica Sandström, in charge of ongoing hybrid-

requirements would become increasingly

formance.

development projects at Volvo Powertrain.

tough, but not what technology was the best

Today, the Group has two engine platforms: a

choice to meet the new requirements. Since it

heavy one developed and produced by Volvo

The new hybrid solution could be on the market as early as 2009.

was impractical to develop new technology for

Powertrain, and a medium-heavy one devel-

“Development is proceeding rapidly and we

18 different platforms, the Volvo Group decided

oped and produced in cooperation with Deutz.

are positioned to capitalize on all the advan-

to concentrate on two platforms to meet the

Volvo Powertrain’s platform concept has

tages that come from being a truly global com-

legal requirements contained in US’10 and

successfully been implemented for heavy gear-

pany with world-leading technology and pro-

boxes and axles.

cesses,” says Lars-Göran Moberg.

Common strength
Create synergies

Utilize synergies

Common
architecture
and shared
technology

Results

Advantages

Large base volume

Broad product offering and optimal investments

Large volumes of components

Low product cost

Common architecture

Advanced engine development

Shared technology

Enhanced quality, fewer item numbers
and higher efficiency

Common suppliers

Lower costs and higher efficiency

A global group 2006

27

INTERVIEW

LONG-TERM STRATEGY

IN ASIA

28

A global group 2006

in the Chinese wheel loader
producer Lingong.

“These are important

their vehicles over a larger part of the day.
Higher quality, better operating characteristics

strengthen our presence in

and lower fuel consumption will then become

Asia,” says Jorma Halonen,

key parameters, and these areas are in which

Deputy CEO with specific responsibility for the Group’s expansion
in Asia. “Behind us, we have the
successful acquisition of what
Dongfeng

is now Volvo’s excavator oper-

Nissan Diesel

ation in South Korea, and we

Acquisitions

the Volvo Group’s strength lies.
While the main focus is often on China when
growth in Asia is discussed, there are naturally
other markets in the region that are of considerable interest to Volvo, such as India, Thailand,
Malaysia, South Korea and Japan.
Public offer for Nissan Diesel

have previously made explor-

During the year, AB Volvo acquired 19 percent

atory moves in China and else-

of the shares in Nissan Diesel from Nissan

where, but now it feels as if we have

The Volvo Group has experience of acquiring
companies in Southeast Asia and developing
them into strong parts of the Group’s global organization. The construction-machine division of
South Korean company Samsung Heavy Indu–
stries was purchased in 1998 and its name
changed to Volvo Construction Equipment Korea
Ltd. Its operations are mostly concerned with the
production of excavators. Since the acquisition,
the company has developed favorably, with an
increased rate of product renewal, rising volumes
and improved profitability.

increasingly wish to make maximum use of

steps in our strategy to

Executive Vice President and

Volvo Group

petition increases, Chinese companies will

gained a real foothold in Asia.”

Motors and in February 2007, presented a public offer for the remaining shares in the company. Nissan Diesel has staged a very strong

Huge market with rapid growth

recovery during the past few years and is today

There is intense activity, accompanied by

a profitable and attractive company with an

extremely high growth figures, in the Asian

established position in the truck sector in

economies. And these are in no way small mar-

Southeast Asia.

kets – of the approximately one million heavy

Nissan Diesel’s and the Volvo Group’s prod-

trucks sold each year in the world market, Asia

ucts and geographic coverage complement

1998

2006

accounts for one third, and China alone for one

each other, and the deal paves the way for

Number of employees

1,565

1,443

fourth.

cooperation in the areas of components, pro-

Net sales, SEK M

2,028

9,395

In China, signs of economic growth are vis-

duction, sales and aftermarket, as well as cre-

Loss

765

ible in most parts of the country and include

ating opportunities for joint development of

construction of infrastructure, such as roads

engines and gearboxes.

Profitability, SEK M

Long-term strategy in Asia

and railways, and buildings for offices or hous-

During the past few years, the Volvo Group has

ing. As an example, China had 35,000 kilo-

China’s largest truck producer

taken several steps forward in its Asian strat-

meters of expressway in 2006 and this figure is

Dongfeng Motor Co Ltd. is China’s largest truck

egy, whereby the Volvo Group’s aim is to make

set to double by 2010. Many of the highways

producer, with annual production of some

Asia one of its core markets in the future, in the

have six or eight lanes. By way of comparison,

170,000 trucks. Dongfeng Motor Co Ltd. is in

same way as Europe and North America are

Europe has approximately 54,000 kilometers

equal parts owned by car manufacturer Nissan

core markets today.

of expressway and the US 85,000 kilometers.

Motors and Dongfeng Motor Group.

During 2006, AB Volvo purchased a holding

“Half of the world’s population lives in Asia,

In the beginning of 2007, AB Volvo, Nissan

in Japanese truck producer Nissan Diesel and

and that’s where growth is largest,” says Jorma

Motors and Dongfeng Motor Group deepened

in February 2007, presented a public offer for

Halonen. “For that reason, among others, this is

discussions on how the commercial-vehicle

the whole company. The holding in Nissan

a market where we must naturally be more

operations best can be developed. At that time,

Diesel opened up for the discussions on a pos-

active than previously.”

a non-binding framework agreement was

sible investment in Chinese Dongfeng Motor,

However, it needs to be borne in mind that

signed with the intention of AB Volvo to invest

which manufactures heavy and medium-duty

the major portion of the trucks, buses and con-

in the heavy and medium-duty commercial
vehicle and engine business.

commercial vehicles. In 2006, the Volvo Group

struction equipment currently sold there are

also decided to establish a partnership to pro-

domestically produced, and that vehicles con-

duce bus bodies in India, and in January 2007,

forming to Western European or North

could open up for us are enormous. To be a

closed the acquisition of a 70-percent interest

American standards have had difficulty com-

global company, it is simply essential to have

Jorma Halonen & Tony Helsham

“If handled properly, the opportunities that

peting. The price differential has been far too

production and growing sales in Asia,” says

large – at least so far. But Jorma Halonen

Jorma Halonen.

points out that as the economy grows and comJorma Halonen in conversation with Tony Helsham
during a Group Executive Committee meeting in
November 2006.

A global group 2006

29

The share
The Volvo Group’s strategy has resulted in structurally higher
profitability, a lower risk level and a stronger cash flow. Combined,
these have resulted in increased shareholder value.
>>> The Volvo share is listed on the Stockholm

Trading in Volvo A shares on the Stockholm

Additional information concerning the Volvo

Stock Exchange in Sweden and on the

Stock Exchange increased by 43% compared

share is presented in the 11-year summary on

NASDAQ exchange in the US. Volvo A and

with 2005 and the share price rose by 33%. At

page 158.

Volvo B shares are traded on the Stockholm

year-end, the share price for the A share was

Stock Exchange and a trading block consists of

SEK 486.00. The highest price paid was SEK

Dividend

100 shares each. One Volvo A share entitles

493.00 on November 15, 2006, which is the

The objective of Volvo’s dividend policy is that

the holder

highest price paid for Volvo A shares up until

the long-term total return to shareholders

to one vote

the end of 2006.

should exceed the average for the industry.

at

Annual

Trading in Volvo B shares on the Stockholm

Historically, dividends on Volvo shares have

General Meetings and one Volvo B share enti-

Stock Exchange increased by 19% compared

risen steadily. The Volvo share’s total return, that

tles the holder to one tenth of a vote. Dividends

with 2005. The share price rose by 25% and

is, the share’s value development plus reinvested

are the same for both classes of shares. Since

was SEK 471.50 per share at year-end. The

dividends, has amounted to an average of 49%

1985, a program for American Depositary

highest price paid was SEK 478.50 on

per year since 2002. This can be compared

Receipts (ADRs) has existed in the United

November 15, 2006, which is the highest price

with the average total return for the Stockholm

States. Each ADR represents one Volvo B

paid for Volvo B shares up until the end of

Stock Exchange in its entirety, which during the

share.

2006.

same period, was 16%, according to SIX.

The Volvo Share is included in a large num-

On NASDAQ, the volume of trading in the

For fiscal year 2006, the Board of Directors

ber of indexes that are compiled by Dow

Volvo share fell by 28%, while the share price

proposes that the shareholders at the Annual

Jones, FTSE, S&P, the OMX Nordic Exchange

rose by 40%. At year-end, the share price was

General Meeting approve an ordinary dividend

and Affärsvärlden, among others.

USD 68.75 (SEK 472.50).

of SEK 25 per share and an extraordinary pay-

In 2006, a total of 673 (558) million Volvo

ment through a 6:1 share split in which the

Positive trend for the share

shares were traded on the Stockholm Stock

sixth share will be redeemed by AB Volvo for an

In general, the trend on the world’s leading

Exchange, corresponding to a daily average

amount of SEK 25 per share. The share split

stock exchanges was positive in 2006. On the

of 2.7 (2.2) million shares traded. At year-end

reduces the value of each trading block and

Stockholm Stock Exchange, OMXS index rose

2006, Volvo’s market capitalization totaled

should make trading easier for shareholders

by 23.6%.

SEK 193 billion (150).

with smaller holdings.

Earnings and cash dividend per share

Total return, Volvo B

Earnings1 per share
Dividend per share
Extraordinary payment

250

1 Years 2004, 2005 and
2006 are reported in accordance with IFRS and 2002
and 2003 in accordance
with prevailing Swedish
GAAP. See Note 1 and 3.

1 Following the repurchase of its own shares,
AB Volvo held 4.9% of the Company´s shares on
December 31, 2006.
2 Based on all registered shares.

Credit rating at December 31, 2006
Moody’s
Standard & Poor

Short term

Long term

P-2 stable
A2 stable

A3 stable
Not rated

Through a separate website at www.volvo.com,
it is possible for shareholders and other stakeholders to view and download financial reports
for the past ten years and search for informa-

Ownership by country 1, %

Ownership categories 1, %

Sweden 47%

Non-Swedish owners 53%

France 21%

Savings funds 10%

USA 13%

Pension funds and
insurance companies 16%

United Kingdom 8%

1 Share of capital, registered shares.

Switzerland 2%

Swedish private shareholders 11%

Others 9%

Others 10%

More details on the
Volvo share are provided
on page 158 Volvo share
statistics.

1 Share of capital, registered shares.

A global group 2006

31

Sustainable development

The Volvo Group’s mission
The Volvo Group’s mission is to create value for
its shareholders by creating value for its cus-

“As a vehicle manufacturer we have major
responsibility for the environment and to contribute to a sustainable society. We view this
responsibility with the greatest seriousness.”
Leif Johansson

tomers. Volvo sees sustainable development,
both in environmental and social terms, as a
vital prerequisite for long-term profitability and
increased customer and shareholder value.
The Volvo Group has a strong impact on the
communities in which it operates. The Group’s
companies are major employers as well as providing work for a large number of subcontract-

.

ors. The Volvo Group aims to be a strong partner for entrepreneurs, suppliers and other
players in the community and a good employer
for its employees. The Volvo Group aims to promote prosperity and sustainable development.

The basis of our
sustainability efforts
The Volvo Group strives to conduct responsible
business based on its Code of Conduct, core
values and established guidelines. The Volvo
Group’s Code of Conduct and corporate values
– quality, safety and environment care – form
the basis of the company’s sustainability
efforts.
The Volvo Group’s Code of Conduct
The Volvo Group’s Code of Conduct was

ciples by which the Group conducts its relations
with employees, business partners and other
stakeholders. It applies to all employees of the
Volvo Group and to the members of the Board
of Directors.

n/a
13,3
42,2
122,1
10,3

5.2
11,6
32,1
102,0
8,5

4.7
10,5
30,6
108,8
8,3

Suppliers, dealers, consultants and other
business partners are also encouraged to follow these principles. The Code of Conduct is
applied in assessing both current and potential
suppliers.

Long tradition of reporting
AB Volvo published its first environmental report in 1990. Sustainability
efforts have been included in the Group’s annual report since 2002. The
purpose of the sustainability report is to present the Volvo Group’s shortand long-term sustainability efforts. The sustainability report is based on
the relevant parts of the Sustainability Reporting Guidelines elaborated by
the Global Reporting Initiative and issued in 2006. Unless otherwise
stated, the information relates to the entire Volvo Group.

32

Sustainable development 2006

The Volvo Group’s managers are responsible
for informing their respective organisations
about the content of the Code of Conduct and

for encouraging employees to report any behavior that is non-compliant with its principles.

Environmental care is one of Volvo’s corpor-

Quality-driven organization

ate values, along with quality and safety. As

The Volvo Group is a customer- and quality-

The Code of Conduct is based on the UN

one of the world’s largest manufacturers of

driven organization. Its products are often cru-

Global Compact and it offers guidelines re-

heavy vehicles, the Volvo Group has a heavy

cial to its customers’ success and must there-

garding legislation, business partner relations,

responsibility for reducing its products’ envir-

fore meet the highest possible standards. The

accounting and reporting, conflicts of interest,

onmental impact. If the Group succeeds in

goal is to be the leader in the industry and to

political involvement and stakeholder commu-

this, it helps strengthen both its own and its

achieve the highest customer satisfaction.

nications.

customers’ competitiveness, while at the same

The conditions for reliability and customer

time contributing to positive social develop-

benefit are already established at the product

ment.

design and development stage. The Group’s

report actual or suspected violations may not

Well-established,

based on customer

be discriminated against or otherwise penal-

widespread organization

needs. By measuring

ized. All persons handling such reports are

The Volvo Group applies an ISO 14001-certi-

customer

sworn to confidentiality.

The Volvo Group has a reporting system for
behavior that may be non-compliant with the

quality

Code of Conduct. Employees who in good faith

concept

is

satisfac-

fied environmental management system. As far

tion,

With regard to environmental management,

as possible, the same methods are used for

ensures

the Volvo Group aims to rationalize resources

sustainability reporting as for financial reporting.

focuses on the right

and applies the cautionary principle. The Group

All the Group’s business areas and business

things, and the results

routinely checks that its environmental efforts

units have their own quality, safety and environ-

are taken into account

are aligned with environmental targets.

mental managers. These issues are integrated

in the ongoing improvement efforts.

the

company
that

it

With regard to human rights and working con-

into the daily routines and are a normal aspect

Everyone in the organization is responsible

ditions, the Volvo Group supports and respects

of operational responsibility. The Volvo Group

for day-to-day quality work. All units within the
Group have action plans for continuous

the protection of internationally proclaimed

applies

human rights and works to ensure that the

improvement and product development. These

integrated

routines

for

process

improvements. Most of the Volvo Group’s

Group is not complicit in human rights abuses.

routines include review meetings with clear

employees work in operations covered by ISO

goals for quality, safety and environmental per-

9001:2000 certified quality management sys-

Corporate values applied from the start

formance, which must be achieved before

tems.

Everything that the Volvo Group does is driven

product development projects can continue to

by an uncompromising focus on quality. Product

the next stage.

and service offerings should be of the highest

At Group level, these efforts are coordinated

quality in order to provide optimum customer

by a council for each of the corporate values:

value. This quality commitment requires con-

Quality, Safety and Care for the Environment.

sistent working methods to be adopted

These councils are made up of the Quality,

throughout the organization.

Safety and Environmental managers from each

“Cars are driven by people. This means that

business area and business unit. They support

safety is – and must always be – the basic prin-

the executive management and Board of

ciple behind everything the Volvo Group does.”

Directors in quality, safety and environmental

This quote is by Gustaf Larson, one of Volvo’s

matters and act as an advisory body in Group-

founders. Right from the start, Volvo has had a

wide issues.

solid reputation for safety. Over the years, the

The Group Executive Committee has ultim-

Volvo safety concept has evolved to encom-

ate responsibility for sustainability efforts.

pass safety in an increasingly broad context.

Jan-Eric Sundgren is the Group Executive

High safety standards are the basis of efficient

Committee member responsible for these

transport.

issues.

The Volvo Group also imposes rigorous
demands on its subcontractors, who are continuously evaluated. Among other elements,

Volvo Group supports UN’s
Global Compact
Since 2001, the Volvo Group has supported the
UN’s Global Compact and the Treaty’s ten principles, which are based on the UN’s Universal
Declaration of Human Rights, the UN Convention
Against Corruption, the conventions of the
International Labor Organization (ILO) on basic
principles and rights in working life and the Rio
Declaration on the Environment and Development.
The Global Compact was instituted to promote responsible business enterprise worldwide.
By supporting the Global Compact, the Volvo
Group commits itself to implementing and integrating ten principles regarding human rights,
working conditions and the environment in its
operations. For more information, see
www.unglobalcompact.org.

Sustainable development 2006

33

subcontractors must have an explicitly stated

deal with customers on a daily basis. The

Dialog with employees primarily takes place

target of delivering faultless products and ser-

Group’s partners and distributors also play an

during day-to-day work, but also within formal-

vices as well as established quality manage-

important role in this respect. Other important

ized structures such as individual performance

ment systems, a focus on continuous improve-

forums are customer satisfaction and quality

appraisal interviews, department meetings and

ments and a holistic view of product life cycle.

surveys and focus groups with customers in

staff surveys. All Volvo employees can send

areas such as product development.

questions directly to the Group CEO via the

Active dialog with stakeholders

The Volvo Group presents its interim reports

intranet.

The Volvo Group strives for an open dialog with

and financial statements to the media, analysts

The Volvo Group aims to maintain an open

stakeholders at many different levels and in

and investors. In addition, representatives of

dialog to keep society informed about the

many different contexts, and aims to communi-

the Group meet various financial market play-

Group’s activities and future plans. The Group

cate clearly and honestly with the surrounding

ers during the year. Interest has increased in

collaborates extensively with universities and

world. Representatives of the Group participate

investing in Volvo’s shares as well as in the

colleges worldwide.

in seminars, networks and conferences with

Group’s sustainability efforts – particularly from

the aim of facilitating dialogue with society as a

environmental and ethical funds. The Volvo

whole.

Group has enjoyed high sustainability ratings in

The main points of contact with customers
are the sales and service organizations, which

several surveys including the Dow Jones
Sustainability Index and Global 100.

Qualified for the Dow Jones
sustainability index for the fifth
consecutive year
AB Volvo has qualified once again for the Dow
Jones Sustainability World Index of globally leading companies in the area of long-term sustainable development. Volvo is one of the few Swedish
companies to rank on both the Dow Jones
Sustainability World Index (DJSI World) and the
Dow Jones STOXX Sustainability Index (DJSI
STOXX).
For the fifth consecutive year, AB Volvo has
been included in DJSI World thanks to the
Group’s sustainability efforts in economic, environmental and social issues. This means that AB
Volvo ranks among the top 10% of companies
worldwide in terms of combining financial profit
with environmental and social responsibility. AB
Volvo gained particularly high ratings for environmental care and corporate governance. AB Volvo
is one of only five Swedish companies listed on
DJSI World.
For the third consecutive year, AB Volvo is
also included in DJSI STOXX, an index of leading European companies in the area of longterm sustainable development.

Volvo Group noted for its environmental responsibility
The Volvo Group is top among Swedish companies with regard to responsibility for the environment, according to the Climate Index 2006 survey. For the tenth consecutive year, insurance
company Folksam has collected information
about the environmental and climate-related
operations of major Swedish corporations. The
survey encompasses emissions from production
as well as the results of the company’s pro-environmental work with regard to cargo transport,
buildings and premises, product design and business travel. The index is a collation of the company’s overall emissions, undertaken climate
measures and the quality of the way it presents and publicizes its emissions. Some 270
Swedish stock exchange-listed companies were
surveyed. Combined they account for 95 percent
of the total carbon dioxide emissions in Sweden.
The Volvo Group’s total points give it a leading
position in the “best in class” group in Climate
Index 2006.

34

Sustainable development 2006

During 2007 windpower plants will be built adjacent
to the Volvo Trucks plants in Gent and Göteborg.

Environmental responsibility
Environmental management is a cornerstone of the Volvo Group’s sustainable development efforts. Environmental care is also one of the Group’s corporate values. Volvo’s
environmental work is long-term and methodical and has two clear targets: reducing
environmental impact from production, and reducing environmental impact from product
use.
Environmental
management system

ational responsibility. All production facilities

• Implementing a strategy for tomorrow’s fuels

have environmental coordinators. Issues relat-

• Including alternative fuels and alternative

Volvo’s Group-wide environmental policy is one

ing to emission levels, fuel consumption and

of the primary instruments for guiding Volvo’s

choice of materials are handled by the develop-

drivelines in product plans.

In production

environmental efforts. This policy forms the

ment departments in the respective business

basis for the Group’s environmental manage-

areas and the Group-wide development units.

Volvo Group has production facilities on every

ment system, strategies and targets, reviews

Every business area has an environmental

continent, ranging from state-of-the-art, highly

and measures.

manager. The Volvo Group also has internal

automated factories to small-scale production.

The environmental policy states that the

consultants with specialized expertise in areas

Volvo Group’s environmental program shall be

such as chemicals, life cycle assessments,

Regardless of size and location, all produc-

characterised by a holistic view, continuous

environmental audits and environmental pro-

tion units must meet the Group’s minimum

improvement, technical development and effi-

tection.

requirements for environmental performance.

Environmental targets

chemical use, energy consumption, air and

The Group’s environmental targets are used

water emissions, waste management, environ-

for follow-up purposes throughout the organi-

mental organization and improvement efforts.

These requirements include guidelines for

cient use of resources. The policy is in turn broken down into strategies and targets for the
organization.
An environmental management system is a
tool for monitoring an organization’s specific

energy by 2008 compared with 2003
• Terminating all use of oil and coal for the heating of facilities.

Regular environmental audits
Since 1989, Volvo has been carrying out environmental audits to ensure that all the plants
comply with the Group’s environmental policy.
The Volvo Group has insurance coverage for

ment to expanding the Group’s environmental

Challenges regarding product use:

environmentally related damage to its immedi-

program to include collaboration partners, for

• Achieving high fuel efficiency and low emis-

ate surroundings, for instance in the event of

instance suppliers and distributors. Environ-

sions throughout product life cycles

unexpected emissions. Newly acquired com-

mental demands on suppliers were introduced

• Measuring against the best

panies and properties are subjected to due

in 1996 and are used as an integrated part of

• Consistently carrying out activities to become

diligence examinations which, in addition to

the evaluation of suppliers and for follow-up of
various purchasing organizations.
Responsibility for environmental work at
production facilities is a normal aspect of oper-

the industry leader
• Producing environmental data for follow-up

financial and legal aspects, also examine environmental factors and risks.

and communication for each new product
developed

Sustainable development 2006

35

Volvo’s new diesel engines are leading in terms of
fuel efficiency.

Activities requiring a permit

scrapping. The basic principle is that each new

All the Volvo Group’s production facilities have

product must cause less environmental impact

the requisite environmental permits. In Sweden,

than

there are 16 facilities that require permits.

sets rigorous environmental requirements for

These permits encompass waste, noise and

the development of new products.

emissions into the air, ground and water. One

the

product

it

replaces,

which

The “Production” section describes aspects

Swedish environmental permit was renewed

such as energy consumption, emissions and

in 2006, and four permits are due for renewal

waste, while the “Use” section provides details

in 2007.

of fuel consumption, emissions and the use of
spare parts. The third section deals with scrap-

Environmental care right from the start

ping. The Group’s products are recoverable to a

The Volvo Group manufactures a

large extent. For instance, up to 95% of some

large number of products with

trucks can be recovered. Recovered materials

varying environmental impact.

are also used in production.

Whatever the product, environmental care is
considered right from

Environmentally adapted production

the product develop-

Environmental protection and respon-

Volvo Construction Equipment decided to

ment stage. Life cycle

sible utilization of natural resources are

invest SEK 150 M in a new paintshop at its facil-

analyses

a

obvious aspects of all production. During

ity in Hallsberg. The new paintshop will lead to

complete picture of

provide

the year, Volvo Trucks decided to make

better quality, higher capacity, reduced costs

the Group’s products’

its automotive facility in Gent carbon-

and many environmental improvements. Solv-

environmental impact

dioxide neutral. Today, the facility is pri-

ent emissions will be halved, greenhouse emis-

throughout their life-

marily heated with natural gas. Three

sions will be dramatically reduced through

span, from raw material

windpower plants and a new biofuel

lower fuel consumption, and considerably less

plant, that will be carbon-dioxide neutral, will

waste will be generated. The new paintshop will

Life cycle analyses of the Group’s products

be built adjacent to the facility to provide it

have its own treatment plant, which will more
than halve the discharge of water to the munic-

to waste.
show that almost 90% of their total environ-

with electricity and heating. In 2005, Volvo

mental impact from carbon-dioxide and other

Trucks launched its first carbon-dioxide neutral

ipal treatment plant despite increased produc-

emissions from fossil fuel combustion occur

facility in Tuve, Göteborg. In Göteborg and in

tion volume.

during their use.

Gent long-term agreements on delivery have

Volvo Trucks’ cab factory in Umeå imple-

Environmental declarations are produced to

been made with the respective energy supplier,

mented further environmental initiatives during

describe the environmental impact from some

who will invest in the windpower plant. Volvo

the year. For instance, plastic parts will be

of the Group’s key products. These declarations

Trucks’ facility in Umeå will also be made car-

painted in a new paintshop to reduce the total

consist of three parts: production, use and

bon-dioxide neutral, and the aim is for more

environmental load. This initiative will cost SEK

production facilities to follow suit.

Energy consumption

Water consumption

Energy, TWh

Water, Mm 3

k ton

Energy/net
sales MWh/
SEK M

Water/net
sales m 3/
SEK M

Waste/net
sales kg/
SEK M

Energy consumption/
net sales has been
reduced by 9%
in 2006.

Water consumption/
net sales has been
reduced by 5%
in 2006.

02 03 04 05 06
2.6 2.6 2.7 2.7 2.6
14.5 14.9 13.4 11.6 10.5

36

Hazardous waste

Sustainable development 2006

02 03 04 05 06
9.2 8.6 8.5 7.4 7.6
52.0 49.1 42.2 32.1 30.6

Hazardous waste/
net sales has
increased by 7%
in 2006.

02 03 04 05 06
20.5 21.6 24.7 23.6 27.0
116 124 123 102 109

In order to improve air quality, governments in many countries are making
increasingly stringent demands for the
reduction of emissions, primarily nitrogen oxides and particulates. New,
stricter emission laws were introduced
in the EU on October 1, 2006 and in the
USA on January 1, 2007 for trucks and
buses. Even stricter requirements will be introduced in a few years’ time. To meet these
requirements, the Volvo Group is continuously
developing new engine technology to minimise
fuel consumption and emissions. The primary
focus of this development work is on diesel
engines.
One of the most
138 M and is the second stage in a total invest-

origins. In 2006, cleaning-up activities were

important environmen-

ment of SEK 650 M in the paintshop. The

conducted on six properties.

tal issues is climate

investment will improve quality, cost and environmental performance.
The Volvo Group’s activities generate transportation to and from production facilities. The
Group’s logistics managers regularly review

During 2006 there were no significant envir-

change, which affects

onmental incidents and there were no environ-

all aspects of society.

mental disputes.

The way in which cli-

For detailed environmental information about

mate issues are handled will impact strongly

the Volvo Group’s facilities, see page 161.

on global development.

these flows and continuously make improvements to considerably cut the amount of trans-

During use

Rising carbon dioxide

portation and facilitate a significant reduction

The greatest environmental impact caused by

levels in the atmosphere are primarily caused

in total environmental impact. To assess the

the Volvo Group’s products occurs during use.

by the combustion of fossil fuels from oil, coal

environmental impact, Volvo Logistics has

The Volvo Group primarily uses diesel

and natural gas. The transport sector is

developed a system for calculating environ-

engines in its products due to their high energy

responsible for roughly 25% of fossil fuel con-

efficiency and low emissions.

sumption, and for 25% of carbon dioxide emis-

Improved fuel efficiency is a

sions. Road traffic is responsible for approxi-

owned by the Volvo Group is cataloged every

highly effective way of reducing

mately 15%.

year. This pollution generally has historic

carbon-dioxide emissions and cutting costs

mental load.
The existence of polluted land on properties

Climate change and access to energy
sources may strongly affect the Volvo Group. It

Both Europe and North America
are introducing increasingly strict
emissions laws.

sizeable share of their costs.

All heavy trucks and buses registered in EU countries from October 1, 2006, onwards must meet
Euro 4 requirements. An engine that meets
Euro 3 requirements differs significantly from a
Euro 4-compliant engine in terms of its exhaust
gas emissions. Emissions of nitrogen oxide
(NOx) must be cut from 5 to 3.5 g/kWh, a
decrease of 30%. Particulate emissions (PM)
must drop from 0.1 to 0.02 g/kWh, a reduction
of 80%. Euro 5, which takes effect on October1,
2009, will reduce NOx emission levels by half
compared to Euro 4.

In 2006, the Swedish National Energy
Administration awarded AB Volvo a grant of
Increasingly efficient engines

SEK 62 M for the development of third-genera-

Since 1980, the fuel consumption

tion DME engines for heavy vehicles between

of Volvo’s trucks has dropped by

2006 and 2010. The project will generate

30% at the same time as the engines have

automotive technology for a major field test of

become cleaner. Over the past 30 years, diesel

DME-powered trucks, which is scheduled for

engines have seen a hundredfold reduction of

2009 and 2010. The Volvo Group is also invest-

regulated emissions.

ing heavily in the project.

Further important strides were taken in

Other interesting renewable fuels are biodie-

2006. The Volvo Group presented a completely

sel (FAME, Fatty Acid Methyl Esters) and bio-

0.4

new engine family to meet the stricter environ-

gas. FAME works splendidly in low-blends with

0.3

mental requirements introduced in North

conventional diesel fuel. Minor adjustments of

America on January 1, 2007. The Volvo Group

the engines will make them run on 100 %

Tier 3, 2006

Tier 2, 2002

0.2
0.1
0

0

1

2

3

4

5

6

Tier 4A, 2011
Tier 4B, 2014

7

8

9

NOx, g/kWh

was among the first truck manufacturers to

biodiesel. Biogas emits minimal amounts of

have its engines approved according to US’07

particulates, nitrogen oxides, carbon-dioxide

by the US Environmental Protection Agency.

and the level of noise in the vehicle is also lower.

The US has a highly ambitious plan for
reducing emissions from heavy traffic. Starting
from 2007, the proportion of nitrogen oxide

Nitrogen oxide and particulate emissions have
fallen by about 60% since 1996. When Tier 3
was introduced, Volvo Construction Equipment
launched products equipped with the new VACT technology (Volvo Advanced Combustion
Technology), which minimizes emissions by
adjusting the combustion process in the engine.
Nitrogen oxide and particulate emissions will
decline by a further 90% by 2014 compared
with today’s Tier 3 level.

38

Alternative fuels
A diesel engine is a

Sustainable development 2006

and particulates will be reduced by 50% and
90% respectively in new engines. Emission
requirements in the US will become even
stricter in 2010.

This makes biogas particularly suitable for
vehicles in city traffic.

Hybrid technology

Volvo’s Environmental Prize

Internal Environmental Prize awarded to

for heavy vehicles

awarded to three pioneers in

Volvo Trucks North America

In March, the Volvo

marine ecosystems

The Volvo Group’s Internal Environmental Prize

Group presented a

Volvo’s Environmental Prize for 2006 was

was awarded to a group of employees at Volvo

hybrid solution capa-

awarded to three distinguished scientists for

Trucks North America for several environment-

ble of producing up

their research regarding human impact on

enhancing initiatives at the truck plant in New

to 35% energy savings in heavy vehicles. This

global fishing waters and marine environ-

River Valley, Virginia.

solution offers the highest fuel savings in situ-

ments.

The winning team comprised Stephen

ations in which the driver frequently brakes and

The researchers, Professor Ray Hilborn of

Pierett, Michael Kijak, Frank Stanley, Channon

accelerates, for instance in urban bus trans-

the University of Washington in Seattle and

Maycock, Danny Arnold and Thomas Newcomb.

port, urban distribution operations, refuse-col-

Professors Daniel Pauly and Carl Walters of

Thanks to the team’s efforts, the water used for

lection duties and construction operations.

the University of British Columbia in Vancouver,

testing operations was reduced by half between

Furthermore, the vehicle’s maintenance costs

won the prize for developing analysis tools that

2003 and 2005 and a system for recycling pro-

can be lowered through reduced wear on the

monitor the rapidly changing threats to marine

cess water was installed. Through automatic

brake system. The diesel engine in the hybrid

ecosystems.

lighting, automation and control of the build-

solution can also be powered by biofuels to
achieve carbon-dioxide neutral transport.

Volvo’s Environmental Prize was introduced

The Volvo Group is also involved in develop-

mental research and development, and has

ing a new type of battery, Effpower, based on

become one of the world’s most prestigious

the proven lead-acid technology

used

in

today’s

starter batteries. The new
technology doubles the bat-

The Volvo Group’s engines
are becoming increasingly
fuel efficient.

teries’ power output and their production cost

ing’s heating and cooling system, energy con-

in 1988 to support and acknowledge environ-

environmental

Cross-section of a particulate trap. Using particulate
traps is one way of reducing emissions of particulates.

awards.

The prize money of SEK
1.5 M is awarded by
the Foundation

of The Volvo Environmental Prize.

can be considerably reduced compared with
other available alternatives. Effpower can make
electric hybrids even more cost-effective.

sumption per produced truck dropped by over
60% between 2001 and 2005. Through

Social responsibility

increased waste separation and a recycling
program, the quantity of deposited waste was
halved between 2000 and 2005, while recycling increased by over 75%. The investments
in the project paid off in less than three years,
and the long-term savings are estimated at
around SEK 11 M per year.
Thanks to its dramatic reduction of green-

The Volvo Group aims to be a good citizen that complies with laws
and regulations and generally acts responsibly and respectfully.
The Volvo Group promotes equal opportunities, fairness and diversity. Employees should be offered stimulating work in a healthy, safe
environment.

house emissions, the New River Valley factory
is among the leading vehicle factories in the socalled Climate Leader program instituted by
the American EPA environmental agency to
reduce carbon-dioxide emissions. Emissions

Volvo as an employer

their own skills. By putting words into action,

dropped by 27% per produced truck in 2003–

The Volvo Group’s vision is to be regarded as a

focusing on implementation and carrying out

2004.

globally leading supplier of commercial trans-

necessary changes faster than the competi-

port solutions. The Group’s employees and

tion, the Volvo Group aims to secure long-term

Environmental Prize awarded to Volvo

their knowledge and competence are a crucial

success.

Powertrain North America

prerequisite in achieving this vision. The Group

Volvo Powertrain in Hagerstown, Maryland, in

aims to be the first-choice employer of both

The employees’ working conditions

the US was awarded a prize by the organiza-

current and future employees.

Achieving success on individual markets

tion Businesses for the Bay for outstanding

The Group had 83,187 employees at the end

requires extensive knowledge of the conditions

environmental efforts. Volvo Powertrain in

of 2006. Each employee is part of a team and is

prevailing on that market. It takes a long time to

Hagerstown manufactures engines for Mack

expected to participate actively in the Group’s

build up this knowledge and experience, so it is

Trucks and Volvo Trucks in North America.

development, change process and future. To

vital that the composition of management and

support this aim, an environment character-

other employees throughout the world reflects

Businesses for the Bay works to protect and

energy,

the societies in which

Bay in Maryland on America’s east coast. Volvo

passion and res-

they operate. At all the

Powertrain has implemented several positive

pect for individuals

environmental measures at its factory and has

is required.

preserve the environment around Chesapeake

ized

by

won the prize for “Outstanding Achievement for
Pollution Prevention at a Large Facility”.
Volvo Powertrain has carried out numerous

The Group’s employees and their
knowledge and competence are a
crucial prerequisite in achieving the
corporate vision.

Corporate
culture a determining factor

larger

facilities,

the

majority of the managers and employees are
from the country or

region in question.

environmental initiatives for sustainable devel-

The ability to develop a competitive corporate

All employees have access via the intranet to

opment. These include introducing a new, more

culture is of critical long-term importance to

guidelines regarding HR policies, values,

efficient heating system that can operate on

the Group’s profitability. Unlike technologies,

recruitment and employment, salaries and

non-fossil fuels. All leakage water from produc-

strategies, structures and business models, a

benefits, employee appraisal sessions and

tion processes is cleaned and recycled at the

corporate culture is unique and difficult for

competence development.

factory, for instance as cooling water. The

competitors to copy.

The policy for wages, salaries and remunerations is based on the Group’s basic values and

building’s lighting and insulation systems have

The Volvo Group’s values and culture are

been upgraded to maximize energy efficiency.

outlined in the book entitled “The Volvo Way”,

principles as formulated in The Volvo Way. They

whose principles guide both managers and

support the Group’s efforts to realize its visions

employees in their daily work.

and business goals.

40

Sustainable development 2006

The Volvo Way is based on the conviction

Wages, salaries and remunerations should

that all employees have the ability and desire to

contribute to Volvo’s image as an attractive

improve operations and, by so doing, to develop

company. Behavior in line with the Company’s

values is rewarded. Extra efforts, qualifications

Reduced sickness absenteeism can improve

Volvo do Brasil voted best employer

and responsible attitudes are valued highly.

the quality of life of the individuals concerned

Other highly valued attributes are innovation,

and also help cut costs for the Volvo Group.

For the consecutive year, Volvo do Brasil was
voted the best employer in the Brazilian transport
sector. The poll was conducted by business
magazines Exame and Você S/A. Volvo also
achieved the highest work enjoyment rating
among major companies and was named the
company with the best occupational health services. Volvo also ranked highly in the categories
of Identity, which measures the company’s values, products and visions, Personal Development,
and Work Satisfaction and Motivation. 150 companies in 20 different industries participated in
the survey.

internal mobility, international work and, par-

These efforts encompass workplace ergo-

ticularly, strong leadership. The principles gov-

nomics, health risks and how to prevent them,

erning wages, salaries and remunerations

various support programs, health examinations

should be clear and familiar to everyone.
Wages and salaries should be individual and

and health issues in connection with workrelated travel and stationing abroad.

differentiated, and should be based on the
same grounds for all employees. Wages and

Continuous competence development

salaries should:

Competence development is a continuous pro-

• reflect the task’s level of difficulty and the

cess that is supported by an internal training

Award for health-enhancing project

employee’s performance

organization. This organization offers em-

• be clearly linked to the

ployees a wide

The ergonomics team at Mack’s Macungie facility recently received the newly instituted Volvo
Group Health and Wellbeing Award at a ceremony in Allentown PA, in the US. Craig Souders,
Greg Mikols and Dave Peirson have been working since 2002 to improve ergonomics at the
Macungie facility.
This work has lead to a dramatic reduction in
the number of muscular strain injuries – from
around 200 to just over 10 injuries. The team won
first prize for “contributing to a substantial rise in
the standard of ergonomics efforts, which may
provide great inspiration to other companies in
the Volvo family”.
The Volvo Group Health and Well-being Award
2006 is a newly instituted award designed to
recognize and reward health improvement projects in the Group.

company’s business and

In recent years, the Volvo Group has
placed increased emphasis on health
and on sickness absenteeism.

are designed to help achieve the Group’s busiThe Volvo Group works to promote a creative,

It is the shared responsibility of managers

healthy and energizing work environment with-

and employees to ensure that each team has

talent for leadership in a systematic, transpar-

out health hazards, a positive environment that

the necessary skills, expertise and resources

ent manner, in order to secure access to quali-

helps make the company more profitable and

to become successful. Each employee should

fied, motivated leaders in key positions at all

attractive. Work environment efforts include

attend an annual performance appraisal inter-

levels.

examining, implementing and following up

view with his or her immediate supervisor.

The Leadership Supply Process is linked to
the Group’s strategy process. Its starting point

activities in order to prevent illness and acci-

Leaders throughout the organization are

dents and achieve a healthy work environment.

expected to involve their teams in the decision-

is the annual Performance Development

Improving the work environment should be a

making process and subsequently focus on

Appraisal process, where leaders and employ-

natural part of the daily routines.

execution. Customer focus, open dialog, feed-

ees meet to discuss the employee’s perfor-

As part of Volvo’s work environment efforts,

back and personal commitment are key prin-

mance during the year in relation to the agreed

more and more of the Group’s operations are

ciples in The Volvo Way, aimed at aligning

targets, personal competence, future potential

being certified in accordance with OHSAS

Group strategies and objectives with daily

and other issues. The appraisals also offer

18001, the international standard for work

teamwork. Objectives and goals are estab-

employees an opportunity to clarify and obtain

environment management systems. This sys-

lished for each unit, department and work team

feedback on their professional ambitions.

tem is a tool for checking work environment

and to a large extent also for employees them-

At the next stage, the leadership teams are

risks and making any necessary improvements,

selves during the individual performance

used at all levels to link the discussion regard-

which in turn are subsequently followed up.

appraisal interviews.

ing strategy and business to the competence
required to meet the company’s business targets and to the employees’ current compe-

Preventative health care and

Future leaders

rehabilitation

A so-called Leadership Supply Process is used

tence. The employees’ performance, future

In recent years, increased emphasis has been

to secure access to future leaders. The aim is to

potential, competence development and career

placed on health and on sickness absenteeism.

identify, develop and retain employees with a

development are also discussed.

Sustainable development 2006

41

Key figures

ments. Diversity generates creativity, which in

Number of employees at year-end
Share of women, %
Share of women, Board members, %
Share of women, Presidents and other senior executives, %

2004

2005

2006

81,078
16
15
16

81,856
17
10
16

83,187
17
11
15

turn leads to innovation, a prerequisite for success.
There are various diversity networks within
the Volvo Group, and several units have diversity managers responsible for promoting ongo-

Absence due to illness in the Group’s Swedish companies
Total absence due to illness of regular working hours, %
of which continuous sick leave for 60 days or more, %
Absence due to illness (as percentage of regular working hours) by gender
Men, %
Women, %
Absence due to illness (as percentage of regular working hours) by age
29 years or younger, %
30–49 years, %
50 years or older, %

5.2
51.4

4.7
49.6

4.9
6.7

4.4
5.7

4.8
4.9
6.2

4.1
4.7
5.1

ing improvement in this area.
Volvo Group Attitude Survey
The Volvo Group Attitude Survey is an annual
Group-wide survey documenting employee
attitudes toward their work and what improvements are required. The results of the survey
are compiled and discussed within each team
to identify key improvement areas.

share of satisfied employees was 84%, compared with 83% the year before, 81% in 2004
and 77% in 2003. Other key indicators monitor
how well each manager involves and communicates with his or her team members, provides
feedback on performance and contributes to
resolving conflicts.
Cooperation with trade
union organizations
The right to be a trade union member and the
right to negotiate collective agreements are
respected throughout the Volvo Group. In
Europe, the Volvo European Works Council was
formed in 1996 to create a forum for dialog
between the employer and employees. Volvo
European Dialog is a forum in which employer
and employee representatives meet once a
year. The Chairman is the Volvo Group’s
President Leif Johansson. In addition to this
forum, the employee representatives have two
meetings per year. Representatives of various
production units outside the EU are invited to
attend one of these meetings every two years.

Restructuring is always carried out in compli-

Sponsorship

About

ance with the laws, rules and practices that

Sport and culture have been the focus of the
Volvo Group’s sponsorship since the 1970s. The
activities that the Volvo Group chooses to sponsor have points of reference with our customer
groups. The aim of this sponsorship is to intensify
our customer relations and strengthen the Volvo
Group’s brands. Volvo currently has six long-term
sponsorship commitments: the Volvo Ocean
Race, the Volvo Masters golf tournaments in
Europe and Asia, Volvo China Open, the Göteborg
Symphony Orchestra, the Göteborg Opera and
the Nobel Museum in Stockholm. In addition,
Renault Trucks sponsors the Olympique Lyonnais
football team.

fifteen

non-European

employees

apply in the relevant

attended such a meeting

country.

The Volvo Group aims to
function as an active partner in
society.

in Lyon in 2006.
The Volvo Group was
not involved in any labor
market conflicts in 2006.

It sometimes becomes necessary to restructure parts of the Volvo Group’s operations, for
instance

occurred in these areas during the year.
The Volvo Group does not contribute funds
to political parties or religious organizations.
The Volvo Group has occasionally engaged
in discussions about providing funding for vari-

In November 2006, an online training program on corruption was launched for all managers, 5,491 of whom had completed the training by year-end. All salaried employees will
receive this training in 2007.

ous infrastructure projects. So far, the Group
has decided against providing such funding.

Cooperation in trade associations
The Volvo Group is a member of several employ-

Human rights

ers’ organizations including the Confederation

The Volvo Group’s Code of Conduct regulates

of Swedish Enterprise (Svenskt Näringsliv),

the company’s views on human rights, which

and trade associations including the Euro-

are based on the UN declarations. The Volvo

pean Automobile Manufacturers Association

Group tolerates no form of child labor or forced

(ACEA).

labor, and works for equal rights, fairness and

The Volvo Group also works together with

diversity. The minimum age for employment is

the European Commission to improve legisla-

the age at which compulsory schooling ends.

tion for the control of emissions from vehicles

The Volvo Group’s business partners are also

that are in use and are required to comply with

expected to follow these principles, regardless

the emission standards in Euro 4 and the com-

of where in the world they operate.

ing Euro 5.

Training on the Code of Conduct

motive research programs in Sweden, France,

The Volvo Group has well-established, strong,

the US and other countries. One example is

valuable brands. It is vitally important for the

Green Car, an initiative for advanced automo-

Volvo Group to familiarize all employees with

tive technology focusing on environment and

the Group’s Code of Conduct and ensure that

growth for a sustainable society.

The Volvo Group is involved in various auto-

they follow its principles.
The Volvo Group has approximately 6,500
managers worldwide. Of these, 5,358 have

44

Sustainable development 2006

Foundation,
the

company

insti-

in

tutes regarding future transport in urban areas.

sion protection, deformation zones, seat belts,

Seat belt reminder becomes standard

The Group also collaborates extensively with

deformable fittings and airbags. Seat belts are

in Volvo trucks

universities and colleges in many countries and

by far the most important safety feature.

To further increase safety for truck drivers,

has initiated several projects of social interest.

From an early stage, the Volvo Group has

Volvo Trucks is introducing an acoustic seat

The Volvo Group participates in many dif-

worked on improving safety for other road-

belt reminder as standard in all vehicles on the

ferent projects at local, national and

users. A large proportion of accidents between

European market.

global level, some of which are

trucks and passen-

described on the Volvo Group’s

ger cars involve fron-

website, www.volvo.com.

tal

collisions.

As

early as 1996, the

Statistics show that

The Volvo Group works consistently to minimise the risk and
consequences of accidents.

most drivers killed or
injured in traffic accidents were not using

Leaders in safety

company introduced

The increasing number of

the Front Underrun Protection System to pre-

the research results compiled by Volvo Trucks’

vehicles on the roads, com-

vent passenger cars from becoming wedged

Traffic Accident Research Team, seat belts are

bined with increasingly high

beneath trucks in a frontal collision. This pro-

highly effective in at least 60% of traffic acci-

seat belts. According to

traffic speeds, raises safety

tection system has been fitted as standard to

dents and could help save a great many lives

requirements for both driv-

Volvo trucks in the EU since 2001, and in 2003

each year if used correctly.

ers and vehicles. For the

the protection system became a legal require-

Volvo Group, safety is about

ment in EU countries. Accident investigations

how its products are used in

show that the Front Underrun Protection

for ferries stopping in Sweden

System substantially reduces injuries.

The Volvo Group offers shipping companies

society. The company works consis-

the opportunity to equip ferries stopping in

tently to minimize the risk and consequences of accidents, and to improve
drivers’ safety and work environment.

Volvo offers breathalyzer equipment

The Volvo Accident Research Team

Sweden with special breathalyzer equipment

During the year, the Volvo Group and Volvo Car

free of charge. The idea is to allow truck and

The program’s first focal point is accident

Corporation launched a joint Traffic Accident

bus drivers using the ferries to voluntarily check

prevention. Human errors or misjudgements

Research Center in China. Through on-site

whether they are within Swedish alcohol limits.

are decisive or strongly contributory causes of

traffic accident research, Volvo builds know-

Since October 1, 2006, all Stena Line ferries

most traffic accidents, a fact that reflects the

ledge to help develop safer vehicles and also

calling at Swedish ports have been equipped

importance of preventative safety characteris-

hopes to contribute to better road traffic safety

with breathalyzers.

tics such as good visibility, driving qualities and

in the world’s most populated country.

brakes. The human factor is also the most com-

The Volvo Group has the automotive indus-

mon cause of accidents involving construction

try’s most advanced traffic accident research.

equipment.

With a center in Göteborg since the early 1970

The second focal point is injury prevention.

and local research activities in the US, the

The Volvo Group is a leader in designing ve-

Group has built up a unique databank with

hicles that protect the driver and passengers in

detailed information about nearly 40,000 acci-

the event of a collision. Safety solutions include

dents involving over 50,000 drivers and pas-

rollover-tested cabs and bodies, frontal colli-

sengers.
Many of the safety systems introduced in

Safer workplaces as Volvo
Construction Equipment invests in
safety helmets
Construction sites are among the worksites with
the highest accident rates. To address this problem, Volvo Construction Equipment initiated a
campaign for improved construction site safety
in 2006. Volvo Construction Equipment has
developed a safety program in which safety problems are tackled at three levels: people, machinery and workplace. Volvo’s protective helmets will
be the most visible element of a broad initiative
to improve health and safety for construction
workers.

trucks and buses over the years originate from
data collected from real accidents by the Traffic
Accident Research Team. Some examples are
the deformable steering column, the Front
Underrun Protection System (FUPS) and the
Electronic Stability Program (ESP). Volvo
Buses aims to install ESP in tourist buses and
seat belts in all its vehicles by 2010.

Sustainable development 2006

45

Board of Directors’ Report
The Volvo Group 2006

Significant events

The year 2006 was eventful, with extensive
product launches and major changes in the
industrial system, particularly toward the end
of the year. Despite this, we posted the best
year in history, in terms of sales and earnings.

“Nissan Diesel’s products and know-how
represent a valuable complement to the
Group’s truck business. Nissan Diesel
holds a solid position in Japan and the rest
of Asia where the Volvo Group foresees
substantial growth potential.”
Leif Johansson
Cooperations and acquisitions
AB Volvo became major
shareholder in Nissan Diesel
On February 20, 2007,
Volvo made a public
offer to acquire the
Japanese truck manufacturer
Diesel.

Nissan
The

offer,

which is supported by Nissan Diesel’s Board of
Directors, means that Volvo offers JPY 540 in
cash per share and the total value of Volvo’s
offer amounts to SEK 7.5 billion. Volvo already
owns a 19% holding in Nissan Diesel and preference shares which can be converted to an
Net sales1, SEK billion

Operating income1,
SEK billion

additional 27.5%, after full dilution.
Volvo’s offer for Nissan Diesel represents a
premium of 32% based on the average prices
during the past three months. The offer is open
through March 23 and is not conditional upon a
lowest level of acceptance, but is dependent on
the necessary approvals from the anti-trust
authorities. Volvo anticipates that payment can
be made for acquired shares on or about March

02 03 04 05 06
177.1
202.2
248.1
174.8
231.2

02
2.8

03

04 05 06
2
22.1
14.7
2.5
18.2

1 As from 2004 figures are reported in accordance with IFRS. Previous
years are reported in accordance with the then prevailing Swedish GAAP.
See note 1 and 3.
2 Excluding adjustment of goodwill.

29, 2007. If the offer for Nissan Diesel is implemented, Volvo will have paid a total of SEK 13
billion for all shares, corresponding to JPY 469
per share.
In 2005, Nissan Diesel sold approximately
42,000 trucks and buses. In Japan, Nissan Diesel

In the Board of Directors’ Report through
page 85, Financial Services is reported in
accordance with the equity method.

46

Board of Directors’ Report 2006

holds a market share of about 24% in heavy
trucks and 15% in the medium-heavy segment.

Sales in 2005 amounted to about SEK 32.5

Agreement between Renault Trucks

wheel loaders. The total market in 2005 was

billion. The company has 8,900 employees.

and the GAZ Group

approximately 110,000 units. Lingong is the

The study of coordination possibilities car-

On June 19, Renault Trucks signed a frame-

fourth largest producer of wheel loaders in

ried out jointly by Volvo and Nissan Diesel iden-

work agreement granting the GAZ Group of

China with a comprehensive dealer network

tified synergies over five years of about EUR

Russia to manufacture the Renault dCi 11

throughout the country. In addition to 16 differ-

200 M annually, slightly more than SEK 1.8 bil-

engine under license. The engines will be man-

ent models of wheel loaders, Lingong also has

lion. The major portion of the integration gains

ufactured for the Russian market and the CIS

a smaller range of backhoe loaders, road rollers

is as a result of increased purchasing volumes,

states (Commonwealth of Independent States).

and excavators. Lingong has around 1,800

but positive effects also arise within product

GAZ Group is a Russian automotive group with

employees and in 2005 posted sales of SEK

development, engines and drivelines. Other

operations that include the manufacturing of

2 billlion.

gains arise in that the companies have access

trucks, buses, construction equipment and

In January 2007, it was announced that all

to each other’s dealer and service networks,

cars, and the aim is to use Renault Trucks’

necessary regulatory approvals for the equity

primarily in Asia but also in other parts of the

engines in the various vehicles. The agreement

investment of 70% in Lingong were received

world.

includes the purchase of certain manufactur-

and the deal is now closed. Volvo CE has

ing machinery and the possibility of using the

invested RMB 328 M, corresponding to slightly

Volvo assesses that the net interest-bearing
debt in Nissan Diesel in accordance with IFRS

more than SEK 300 M, in exchange for 70% of

tooling as well as training.

amounts to about SEK 7.5 billion. Accordingly,

the equity in Lingong. In 2005 Lingong’s oper-

at full consolidation Volvo’s net financial pos-

Volvo plans bus body cooperation in India

ating income was RMB 10 M on revenue of

ition, including the purchase consideration, will

Volvo Bus Corpora-

RMB 2 billion. The deal has no material impact

decline by SEK 15 billion.

tion and the Indian

on Volvo’s financial position.

In March 2006, Volvo acquired 40 million

company Jaico Auto-

shares in Nissan Diesel, corresponding to 13%

mobiles have reach-

Strategic decision on closure of Volvo

of the votes and capital. In September of the

ed an agreement to

Aero’s operations in Bromma

same year, Volvo increased its ownership to

start a joint company

In November, it was announced that Volvo Aero

58.2 million shares corresponding to 19% of

in India for production of bus bodies based on

had initiated codetermination negotiations with

votes and capital. At the same time, Volvo pur-

Volvo Buses’ body technology. Volvo Buses will

the trade unions relating to the closure of Volvo

chased all 57.5 million preference shares in the

be the majority owner with a 70% stake in the

Aero Engine Services (VAES) in Bromma,

company that through 2014 can be converted

new company, which plans to build a new plant

which conducts overhaul of large aircraft

in stages and which in 2014, after full conver-

with a capacity of 1,000 bus bodies per year.

engines. In recent years, the volumes of the

sion, can provide Volvo with 46.5% of the votes

The bus bodies will primarily be used for Volvo

engines overhauled in Bromma, the JT8D and

buses and coaches in the Indian market, but

JT9D, have declined sharply. Among other

The acquisition strengthens the Volvo

the new company will also investigate possibili-

actions, VAES has tried to offset the declining

Group’s Asian strategy and is intended to pro-

ties to export buses to other Volvo markets.

volumes through complementing operations

vide the Group with access to Nissan Diesel’s

Jaico Automobiles is a company in the Azad

with a third engine type, the PW4000, but vol-

dealer and service network in Japan and

Group, which carries out body building produc-

umes have not reached the levels required. The

Southeast Asia, and create a further industrial

tion in Bangalore and Jaipur.

company has investigated other possibilities,

and capital in the company, after full dilution.

cooperation with Nissan Diesel in such areas as
engines and transmissions.
AB Volvo, Nissan Motor and Dongfeng

but all attempts have failed.
Volvo Construction Equipment

VAES in Bromma employs 456 persons, 145

invests in China

salaried employees and 311 skilled workers. In

Group, intend, together with Chinese authori-

In

2006,

ties, to evaluate how to best develop Dongfeng

Construction Equip-

operations will be gradually phased out during

Motor Co Ltd’s commercial vehicle business.

ment

2007. Costs for a closure are estimated to SEK

Dongfeng Motor Co. Ltd is jointly owned by

signed an agreement

Nissan Motor and Dongfeng Group.

covering an equity

(Volvo

Volvo
CE)

accordance with the strategic decision, the

258 M.

investment of 70% in
Shandong Lingong Construction Machinery
Co. China is the world’s largest market for

Board of Directors’ Report 2006

47

Dongfeng Motor Group, Nissan Motor

existing range of light trucks, comprising

The previous target for operating margin

and AB Volvo deepen discussions on

Renault Master and Renault Mascott, and is

was 5-7% over a business cycle, including the

possible future cooperation

produced in a range of weight classes from 2.8

operations within Volvo Financial Services. The

In January 2007, it was announced that

to 4.5 tons, with three engine alternatives.

new target for operating margin is more than

Dongfeng Motor Group Company Limited

7% over a business cycle and includes all oper-

(DFG), Nissan Motor and AB Volvo is deepen-

Company information

ations within the Group except Volvo Financial

ing discussions on a possible AB Volvo invest-

Annual General Meeting of AB Volvo

Services, which currently contributes approxi-

ment in the heavy and medium-duty commer-

At the Annual General Meeting of AB Volvo

mately another 1 percentage point. The

cial vehicle business currently included in

held on April 5, 2006, the Board’s proposal to

restricting ratio for net debt to equity has also

Dongfeng Motor Co, Ltd (DFL) – the Chinese

pay a dividend to the shareholders of SEK

been increased from 30% of shareholders’

joint venture between DFG and Nissan Motor.

16.75 per share, a total of about SEK 6,775 M,

equity to 40% of shareholders’ equity. With

Nissan Motor will focus on passenger cars
and light commercial vehicles and has divested

was approved.

regard to the Group’s growth target, the Board

Per-Olof Eriksson, Tom Hedelius, Leif
Louis

Schweitzer

and

Finn

its holding in Nissan Diesel to AB Volvo.

Johansson,

Subsequently, DFG, Nissan Motor and AB Volvo

Johnsson were re-elected members of the

initiated discussions at the end of 2006 with the

Board of AB Volvo and Ying Yeh, Philippe Klein

Reversal of reserve for tax receivables

Chinese authorities on the future possible co-

and Peter Bijur were newly elected. Finn

yields positive earnings effect

operation of the parties. DFG intends to estab-

Johnsson was elected Board Chairman.

growth of at least 10%.

AB Volvo has decided to reverse a valu-

lish more competitive alliances with Nissan and

The Meeting resolved to establish a share-

AB Volvo respectively, in order for all parties to

based incentive program during the second

ation

achieve the best development in their special-

quarter of 2006 for senior executives in the

deferred tax receiv-

ized field.

Volvo Group. The program mainly involves that

ables in the Mack

reserve

for

To move forward on this issue, DFG, Nissan

a maximum of 518,000 Series B shares in the

Trucks Inc. subsid-

Motor, DFL and AB Volvo also have signed a

Company could be allotted to a maximum of

iary. The decision is based on the fact that Volvo

non-binding framework agreement with the

240 senior executives, including members of

assesses that the company has a long-term

intention of AB Volvo to invest in the heavy and

the Group Executive Committee, during the

higher profitability. Reporting of the deferred
tax receivables reduced tax expenses in the

medium-duty commercial vehicle business and

first six months of 2007. The allotment shall

future engine business, while Nissan Motor

depend on the degree of fulfillment of certain

income statement in the third quarter by SEK

remains committed to the long-term coopera-

financial goals for the 2006 fiscal year, which

2,048 M. In accordance with prevailing

tion with DFG regarding passenger vehicles and

have been set by the Board. For more informa-

accounting rules, Volvo is adjusting goodwill by

the light commercial business. Any future defini-

tion on share-based incentive programs see

SEK 1,712 M, which affects operating income

tive agreement regarding such a transaction will

note 34 pages 127 to 129.

adversely. The combined earnings effect for
the third quarter was a positive SEK 336 M.

be subject to approval by Chinese authorities.
Volvo Board decided on new
Renault Trucks in agreement with Nissan

financial targets
AB Volvo’s Board

Motor regarding distribution of light

48

has chosen to retain the target of an annual

trucks

of Directors has de-

Renault Trucks announced in January 2007

cided to adopt new

that it had signed a distribution agreement cov-

financial targets for

ering the Renault Maxity light-duty vehicle with

the company. The

the manufacturer Nissan Motor. An agreement

decision is based on

in principle was signed in February 2006.

the Board’s assessment that Volvo today has a

Renault Maxity is a cab-over-engine light-duty

structurally higher profitability, stronger cash

vehicle developed and produced for Renault

flow and a different risk profile. The Board

Trucks by Nissan Motor. Sales by Renault

focuses on three external financial targets cov-

Trucks’ dealers will begin in March 2007.

ering growth, operating margin and capital

Renault Maxity complements Renault Trucks’

structure.

Board of Directors’ Report 2006

The Volvo FL and Volvo FE are intended for a

New products
Volvo Group premiered hybrid

wider category of customers who do not pri-

technology for heavy vehicles

marily have transport as their main line of busi-

meets the proposed Euro 5 emission standard
that does not become effective until 2009.

In the beginning of

ness. For this reason, Volvo Trucks have devel-

Renault Trucks launches new version

March, Volvo Group

oped an entirely new business concept that

of lightweight truck

presented a new, effi-

enables the customer to quickly and easily pur-

In January 2007, Renault Trucks announced

cient hybrid solution

chase a key-ready truck with a body, rear lift,

the launch of a new version of Renault Mascott.

for heavy vehicles.

and a number of support services, such as a

The new Renault Mascott is equipped with a

The Volvo Group’s

service contract.

new gearbox, new driveshaft and new engine.
Two engine alternatives are available, 130 hp or

rigs with low trailers, such as tankers.
World premiere for new Volvo 7700

easily accessible instrument and control panel

city bus

and substantial storage space. Major emphasis

new, cleaner trucks for distribution

In June, Volvo Buses

was placed on reducing noise levels and the

Volvo Trucks is aiming to reach a broader clien-

premiered the new

vibrations that arise during work operations.

tele outside of the heavy, long-haul segment. In

version of the Volvo

TerraPro Cabover is equipped with an 11-liter

May, Volvo Trucks presented two completely

7700 city bus. The

MP7, available in the 325 to 405 hp classes, or

new distribution trucks – the Volvo FL and the

Volvo 7700 is avail-

the 13-liter MP8 engine, available in the 415 to

Volvo FE. At the same time, a new business

able as a 12-meter

485 hp classes. Both engines are approved in

concept was introduced for distribution ser-

bus for up to 95 passengers and as an 18-

vices in urban environments.

meter articulated bus with space for up to 150

accordance with EPA 07.

The Volvo FL and Volvo FE are cleaner, quie-

passengers. An important feature is the shift

New wheel loader launched

ter and safer, which is important for distribution

from a 7-liter engine to Volvo’s new 9-liter

During the fourth quarter Volvo CE launched its

customers who operate primarily in urban

engine, available in diesel and gas versions,

largest wheel loader ever, the new L350F

areas. Both models meet the environmental

that meets the Euro 4 emission standard. Due

replacing the 330E model. The L350F is

requirements according to Euro 4 and Euro 5.

to Volvo choosing SCR (Selective Catalytic

equipped with Volvos 16 liter engine and with

The latter legal requirement does not take

Reduction) technology, the company can

its improved performance it is a very good bun-

effect until 2009.

already offer its customers an engine that also

dle with the biggest haulers A35 and A40.

Board of Directors’ Report 2006

49

Financial performance

with 2005. Adjusted for currency effects the

2006 was a successful year, net sales rose 7% to SEK 248 billion, income for the period increased by 24% to SEK 16 billion
and basic earnings per share rose to SEK 40.20 (32.22).

in a rising world market, net sales in Construc-

increase was 2%. As a result of a broadened
production range and improved market shares
tion Equipment increased by 17%. Adjusted for
currency ef fects the increase was 17%. Volvo
Penta succeeded in offsetting the reduction in
deliveries of industrial engines to China through
growing on other markets. Net sales rose 7% in
2006, or 8% adjusted for currency changes.
The recovery in the aerospace industry affected

ing adjustment of goodwill of a negative SEK
1,712 M. The increase was 23% compared to
2005. The improved result is attributable primarily to North America, where Mack Trucks
and Volvo Trucks increased profitability
through a favorable price realization and
increased volumes. In Europe, Volvo Trucks

continued to improve its earnings while profit-

Consolidated income statements 1

ability for Renault Trucks’ operations in Europe

SEK M

declined somewhat.
Operating income in Buses continued to
improve as a result of the restructuring implemented earlier. Operating income for full-year
2006 was SEK 633 M, an increase of 35%.
Through strong cost control and increased volumes, Volvo Construction Equipment continued to improve its profitability. Operating
income rose by 41% to SEK 3,888 M in 2006.
Volvo Penta maintained its high profitability
during 2006 and at the same time implemented
aggressive investments in product development and substantial marketing efforts to capitalize on the new and competitive product
portfolio. Operating income increased by 6%
and amounted to SEK 1,002 M.
As an effect of the recovery in the aerospace

2004

Net sales
Cost of sales
Gross income

maintenance operations in Bromma, which had
reported loss for many years. Earnings were
negatively affected in an amount of SEK 258 M

248,135
(192,242)
55,893

Research and development expenses
Selling expenses
Administrative expenses
Other operating income and expenses
Income from Financial Services 1
Income from investments in associated companies
Income from other investments
Operating income 2

(7,614)
(18,317)
(5,310)
7
1,365
2
828
14,679

(7,557)
(19,616)
(6,147)
(397)
2,033
(568)
37
18,153

(8,354)
(19,999)
(6,352)
(3,292)
2,301
61
141
20,399

Interest income and similar credits
Interest expenses and similar charges
Other financial income and expenses 3
Income after financial items

993
(1,426)
(1,210)
13,036

816
(1,134)
181
18,016

897
(816)
(181)
20,299

(3,129)
9,907

(4,908)
13,108

(3,981)
16,318

9,867
40
9,907

13,054
54
13,108

16,268
50
16,318

23.58

32.22

40.20

Income taxes
Income for the period 4
4
Attributable to:
Equity holders of the parent company
Minority

Earnings per share, SEK

1 Financial Services reported in accordance with the equity method.
2 2006 includes an adjustment of goodwill of SEK (1,712) M.
3 2004 includes a write-down relating to the holding in Henlys Group Plc of SEK 1,196 M.

for discontinuation costs. Operating income for

Change in operating income

2006 decreased to SEK 345 M compared to

SEK bn

SEK 836 M for 2005.
The operating income includes a positive
effect of SEK 357 M as a consequence of the
Brazilian Supreme Court’s decision to rule in
AB Volvo’s favor in an export credits dispute. In
addition, costs of SEK 258 M relating to the
decision in principle on closure of Volvo Aero’s
operations in Bromma, Sweden, SEK 100 M
from capacity adjustments in North America
and approximately SEK 1,100 M related to
costs for the changeover in the industrial systems and production starts of new engines and
trucks primarily in Renault Trucks. The operating income for 2005 included costs of approximately SEK 500 for product launches and production starts, costs amounting to SEK 653 M
related to Volvo’s holdings in Peach County
Holding Inc. (bus manufacturer Blue Bird) and
a capital gain from the sale of Celero Support
amounting to approximately SEK 430 M.

2006

231,191
(180,823)
50,368

industry, volumes rose for Volvo Aero. In
November, the decision was taken to phase out

Compared with preceding year, SEK bn
Net sales1
Cost of sales
Research and development expenses
Selling and administrative expenses
Other operating income and expenses
Income from investments in shares
Total effect of changes in exchange
rates on operating income

(0.1)
(0.5)
0.0
0.0
(0.4)
0.0
(1.0)

1 Group sales are reported at average spot rates and
the effects of currency hedges are reported among
”Other operating income and expenses”.

1 Excluding revaluation of shares in Scania AB and
Henlys Group Plc, and excluding goodwill adjustment in 2006.

Research and
development
costs, SEK bn
Research and
development
costs, % of
net sales

02
5.9
3.3

03
6.8
3.9

04 05 06
7.6 7.6 8.4
3.8 3.3 3.4

1 Years 2004, 2005 and 2006 are reported in accordance with IFRS and 2002 and 2003 in accordance with
Swedish GAAP. See Note 1 and 3.

Board of Directors’ Report 2006

51

Impact of exchange rates
on operating income

Financial position

The impact on operating income from currency
movements was negative by approximately
SEK 1 billion compared with 2005. The prime
reason being the declining US dollar during
2006.
Financial net

The Board of Directors proposes an ordinary dividend of
SEK 25 per share and an extraordinary payment through
a 6:1 share split where the sixth share will be redeemed
by AB Volvo for an amount of SEK 25 per share.

The net interest income for 2006 amounted to
SEK 81 M compared to a net interest expense
of SEK 318 M for the preceding year. The

Marketable securities in real estate financial
institutions fell by SEK 12.9 billion during 2006,
which to some degree was offset by an increase
of SEK 6.6 billion in placements in banks and
financial institutions. In total, marketable securities fell by SEK 8.5 billion during 2006, among

others the result of amortization of loans.
During the same period, cash and cash equivalents increased by SEK 2.6 billion. Exchangerate differences resulted in a decline in assets
of SEK 14.5 billion, which primarily affected

Net financial position

receivables in customer financing operations,
inventories and other receivables.
Shareholders’ equity at December 31, 2006

69.3 billion. Amortization for the year amounted
to SEK 72.2 billion. In 2005, net borrowings

12.5

increased cash and cash equivalents by SEK
3.6 billion.
An ordinary dividend amounting to SEK 6.8
billion, corresponding to SEK 16.75 per share,
was paid to AB Volvo’s shareholders during the
year.
Change in liquid funds

Financing activities

Change in other loans, net
Repurchase of own shares
Dividend to AB Volvo’s shareholders
Other

(8.8)
(2.5)
(3.4)
0.0

3.6
(1.8)
(5.1)
0.0

(2.6)
–
(6.8)
0.0

Change in cash and cash equivalents excl translation differences

(0.2)

(1.8)

3.1

Translation differences on cash and cash equivalents

(0.2)

1.1

(0.5)

Change in cash and cash equivalents

(0.4)

(0.7)

2.6

The Group’s liquid funds increased by SEK 2.6
billion during the year amounting to SEK 10.8
billion at December 31, 2006.

Board of Directors’ Report 2006

55

Risk management
– an important part of our operation
All business operations involve risk – managed risk-taking is a
condition of maintaining a sustained favorable profitability.
>>> Risk may be due to events in the world and

involves adjusting production capacity and

can effect a given industry or market. Risk can

operating expenses.

demand and particularly to adapt production

be specific to a single company. At Volvo we
work daily to identify, measure and manage risk

Intense competition

levels, reduce production and operating

– in some cases we can influence the likelihood

Continued consolidation in the industry is

expenses, and deliver competitive new prod-

that a risk-related event will occur. In cases in

expected to create fewer but stronger com-

ucts and services.

which such events are beyond our control, we

petitors. Volvo’s products face substantial

strive to minimize the consequences.

competition, which may have a significant

The commercial vehicles industry

We have chosen to classify the risks to which

impact on the prices Volvo receives for its prod-

is subject to extensive government

the Volvo Group is exposed into three main cat-

ucts and on the Group’s future sales volume.

regulation

egories: External-related risk, Financial risk

Our major competitors are DaimlerChrysler,

Regulations regarding exhaust emission levels,

Paccar, Navistar, MAN, Scania, Caterpillar,

noise, safety and levels of pollutants from pro-

Komatsu, Cummins and Brunswick. In recent

duction plants are extensive within the industry.

External-related risk

years, new competitors have emerged in Asia,

These regulations are subject to change, often

The commercial vehicles industry

particularly in China. These new competitors

making them more restrictive. The costs to

and Operational risk.

is cyclical

are mainly active in their domestic markets, but

comply with these regulations can be signifi-

Historically, the Volvo Group’s markets have

are expected to increase their presence in

cant for the commercial vehicles industry.

undergone significant changes in demand as

other parts of the world.

Most of the regulatory challenges regarding

the general economic environment has fluctu-

Our brands are well-known and strong in

products relate to reduced engine emissions.

ated. Investments in infrastructure, major

many parts of the world. For the Volvo Group, it

The Volvo Group is a significant player in the

industrial projects, mining and housing con-

is important that all brands in the Group are

commercial vehicle industry and the world’s

struction all impact the Group’s operations,

developed and supported. Strong brands com-

largest producer of heavy-duty diesel engines.

since its products are central to these sectors.

bined with an attractive product portfolio make

The product development capacity within the

Economic trends in Europe and North America

it possible for Volvo to be competitive.

Volvo Group is well consolidated to be able to
focus resources for research and development

are particularly important for the Volvo Group,
since a significant portion of the Group’s net

Prices for commercial vehicles

to meet tougher emission regulations. Future

sales are generated in these markets.

may change

product regulations are well known, provided

The cyclical demand for the Group’s prod-

The prices of commercial vehicles have, at

that they are not changed and the product

ucts has, at times, restricted, and may in the

times, changed considerably in certain markets

development strategy is well tuned to the intro-

future temporarily restrict, the ability of the

over a short period. This instability is caused by

duction of new regulations. The new regula-

Volvo Group to manufacture and deliver orders

several factors, such as short-term variations in

tions regarding product emissions are strin-

in a timely manner. A prolonged delay in the

demand, shortages of certain component

gent, but our current assessment is that they

Group’s ability to deliver ordered products on a

products, uncertainty regarding underlying

are manageable for the Volvo Group.

timely basis at a time when its competitors are

economic conditions, changes in import regu-

Volvo has had production facilities in numer-

not experiencing the same difficulty could

lations, excess inventory and increased com-

ous countries worldwide for many years. A

adversely affect the Group’s market shares.

petition. Overcapacity within the industry can

worldwide production standard for environ-

To cope with the peaks and troughs in

occur if there is an economic downturn in the

mental performance has been introduced,

demand, we need to act appropriately in the

Group’s major markets or worldwide, potentially

enabling production plants to achieve best

leading to increased price pressure.

industry standard.

various stages of the business cycle. This

56

The financial result of the business depends
on our ability to quickly react to changes in

Board of Directors’ Report 2006

Financial risk

contracted and expected future payment flows

Market risk from investments in shares

In its operations, the Volvo Group is exposed to

(commercial currency exposure), changes in

or similar instruments

various types of financial risks. Groupwide

the value of loans and investments (financial

The Volvo Group is indirectly exposed to market

policies, which are updated and decided upon

currency exposure) and changes in the value of

risks from shares and other similar instruments

annually, form the basis of each Group com-

assets and liabilities of foreign subsidiaries

as a result of managed capital transferred to

pany’s management of these risks. The object-

(currency exposure of shareholders’ equity). In

independent pension plans being partly

ives of the Group’s policies for management of

addition, currency movements can affect

invested in instruments of these types.

financial risks are to optimize the Group’s capi-

Volvo’s pricing of products sold and materials

tal costs by utilizing economies of scale, to

purchased in foreign currencies as well as

Credit-related risk

minimize negative effects on income as a

those of its competitors, which may be affected

Volvo’s extension of credit is governed by

result of changes in currency or interest rates,

differently by such movements. Since Volvo

Group-wide policies and rules for classifying

to optimize risk exposure and to clarify areas

has substantial manufacturing operations in

customers. Efforts are made to ensure that

of responsibility within the Group’s finance

Sweden and generates a substantial portion

the credit portfolio is reasonably diversified

and treasury activities. Monitoring and control

of its revenues in currencies other than the

among different customer categories and

that established policies are adhered to is

Swedish krona, Volvo’s earnings in Swedish

industries. Credit-associated risk is managed

conducted continuously centrally and at

kronor could be adversely affected short-term

by actively monitoring credit, routines for follow

each Group company. Most of the Volvo

by an appreciation of the Swedish krona against

up and in certain cases repossession of mater-

Group’s financial transactions are carried out

other currencies.

ials. Additionally, continuous and necessary

through Volvo’s in-house bank, Volvo Treasury,

The objective of the Volvo Group’s currency

reserves are monitored in cases involving

which conducts its operations within estab-

risk management is to minimize the short-term

uncertain receivables. An important part of

lished risk mandates and limits. Credit risks

negative effects of exchange-rate fluctuations

the Group’s credit risk is related to how the

are mainly managed by the different business

on the Group’s earnings and financial position.

financial assets of the Group have been placed.

areas.

The Volvo Group employs forward contracts

The majority are placed in Swedish Goverment

and currency options to hedge the value of

bonds and interest-bearing bonds issued by

future payment flows in foreign currencies.

real estate financial institutions.

and 37 on pages 131-137. Volvo’s accounting

Interest-related risk

Liquidity risk

policies for financial instruments are described

Interest-related risk include risks that changes

Volvo ensures its financial preparedness by
always maintaining a certain portion of rev-

The nature of the various financial risks and
objectives and policies for the management of
these risks is described in detail in Notes 36

product development. It is highly important to
meet and exceed customer expectations to be

Board of Directors’ Report 2006

57

competitive in established markets and to be

“Nova Bus”. AB Volvo owns or otherwise has

Volvo continuously reviews its manufactur-

able to expand into additional markets and/or

rights to a number of patents and brands that

ing and administrative processes with the aim

refer to the products the Company manufac-

of ensuring that Volvo products and operations

tures. These patents and brands, acquired over

meet applicable legal and other regulatory

product segments.
Many of our products take a long time to
develop from initial idea to finished product. It

a number of years, have been valuable as the

requirements. Volvo also has insurance cover-

is important to involve customers in the early

Volvo Group’s operations expanded and may

age in certain areas, for example product liabil-

stages of the development process to ensure

continue to be valuable in the future. Volvo does

ity, business interruption and property.

the success of new products. It is just as import-

not consider that any of the Group’s operations

ant to be at the forefront in the research and

are heavily dependent on any single patent or

Risk related to human capital

development of new technologies that are

group of patents.

A decisive factor for the realization of the Volvo

Through Volvo Trademark Holding AB, AB

Group’s vision is our employees and their

products.

Volvo and Volvo Car Coporation jointly own the

knowledge and competence. Future develop-

brand ”Volvo”. AB Volvo has the exclusive right

ment depends on the company’s ability to

The Volvo Group relies on suppliers

to use the ”Volvo” name and trademark for its

maintain its position as an attractive employer.

Volvo purchases raw materials, parts and com-

products

Volvo

To this end, we strive for a work environment in

ponents from numerous outside suppliers. A

Personvagnar AB has the exclusive right to use

which energy, passion and respect for the individual are guiding principles. Every year a

important to the development of successful

and

services.

Similarly,

significant part of the Group’s requirements for

the name and trademark ”Volvo” for its prod-

raw materials and supplies is filled by single-

ucts and services. To protect these rights and

Group-wide survey is conducted, according to

source suppliers. The effects of delivery inter-

avoid any weakening of the brand, AB Volvo and

which the number of satisfied employees is

ruptions vary depending on the item or compon-

Volvo Personvagnar AB jointly introduced a

continually increasing.

ent. Certain items are standard throughout the

control function to govern the use of the brand

industry, whereas others are internally devel-

name and to prevent others from taking unfair

oped and require unique tools that are time-

advantage of it.

consuming to replace. A supplier’s inability to

Similar control functions apply to the use of

deliver could have negative consequences for

the “Mack” brand name, which is owned by AB

production at certain Volvo Group manufac-

Volvo. The Volvo Group’s rights to use the

turing sites.

”Renault” brand are restricted to the truck

The Volvo Group’s costs for raw materials and

industry only and are regulated by a license

components can vary significantly over a busi-

from Renault SA, which owns the “Renault”

ness cycle. Cost variations may be caused by

brand.

changes in world market prices for raw materials
or by an inability of our suppliers to deliver.
The companies in the Volvo Group and their

Complaints and legal actions by customers and other third parties

suppliers work closely together to manage

The Volvo Group could be the target of com-

material flows by monitoring suppliers’ financial

plaints and legal actions initiated by customers,

stability, quality-control systems and produc-

employees and other third parties alleging

tion flexibility.

health, environmental, safety or business
related issues, or failure to comply with applic-

Volvo Group is reliant on the proper

able legislation and regulations. Even if such

protection and maintenance of its

disputes were to be resolved successfully,

intangible assets

without having adverse financial conse-

The Volvo Group’s products are primarily sold

quences, they could negatively impact the

under the brand names “Volvo”, “Volvo Penta”,

Group’s reputation and take up finance and

“Volvo Aero”, “Renault”, “Mack”, “Prévost” and

management resources that could be used for
other purposes.

58

Board of Directors’ Report 2006

Business areas
“We are now seeing increasingly distinct
advantages of the Group being well structured, with effectively coordinated units in
which we gain from the combined volumes
within purchasing, manufacturing and business support functions. The year 2007 will
be exciting, particularly since we will roll out
the entire new product generation on the
markets and take new steps in the expansion
eastward.”
Leif Johansson

During 2006, nearly one in every three heavy-duty
construction trucks sold in the US carried the Mack
Granite name, and more than 55,000 Granite trucks
have been put to work in North America since its
introduction in 2001.

Mack Trucks
– building America
While contributing to the creation of some noted US icons such
as the Hoover Dam, the Empire State Building and the US highway system, Mack Trucks simultaneously built its reputation as a
leading construction vehicle. The Mack Granite truck continues to
bolster this reputation on a daily basis.

>>>

During 2006, citizens in Clarksville,

Maryland wanted to rescue a 130-year-old
building from demolition by moving it to a new

trucks have been put to work in North America
The new Granite MP series, which meets the

site. The relocation company commenced

stringent

exhaust-emission

requirements

operations with the nighttime relocation of the

scheduled to come into effect in 2007 is hall-

150-ton load through hilly terrain; however,

marked by the same customer satisfaction. The

workforce by 450 employees at the Macungie
plant takes place during the fourth quarter of
2006 and first quarter of 2007.

during the move, the transport vehicle broke an

initial customer response to the new truck and

Product introductions

axle while driving over the soft surface. Luckily,

its new Mack MP7 engine was highly positive.

In 2006, the most rapid and comprehensive

the company was able to deploy a newly

As one customer noted:

acquired Mack Granite to complete the move

product renewal in Mack’s 106-year history

“We immediately put the new truck to work in

continued, as the company brought to market

transporting sand some 400 miles each day on

its new highway application tractor, redesigned

This is a striking example of the Granite’s

highways and small roads. There were no prob-

construction application offering, and new

capacity to exceed the high-quality perform-

lems whatsoever. I wouldn’t hesitate to buy sev-

engine technology designed to meet the strin-

ance set by its famous predecessors – and

eral more trucks like this.”

gent US’07 emissions regulations.

without any problems.

Whether it involves the transport of sand,

The Pinnacle model highway tractor and the

snow, cement or entire houses, the Granite

Granite model straight truck each feature

During the past five years since its introduc-

continues to build Mack’s legendary reputation

entirely new driver environments based on

tion, the Mack Granite has become the most

in terms of toughness, reliability and high value.

meet the ambitious expectations imposed by
current Mack customers.

extensive research of customer preferences
and ergonomics – with more belly and leg room,

sold construction vehicle in the US. The Granite
Production

easier-to-read instrument displays, and more

stamina with new features such as an operator-

Manufacturing operations at the Macungie

storage among the improvements.

friendly cab, top-class maneuverability and

plant reached record levels in summer 2006,

The new models are designed around the

cabin visibility as well as industry-leading elec-

with output reaching 107 construction vehicles

new MackPower (MP) engine technology, intro-

tronics that can be readily tailored to suit cus-

daily. Higher demand was partly due to pur-

duced in response to US’07 and featuring mul-

tomer requirements.

combines Mack’s renowned strength and

60

decline in demand in conjunction with new
emission regulations. The reduction of the

since its introduction in 2001.

chases ahead of the introduction of emission

tiple displacements to match the varying de-

The Granite is now the primary choice for

regulations in January 2007. The production of

mands of the Mack customer base. The MP 7

application areas ranging from snow plowing in

Mack’s long-distance trucks also increased

engine is an 11-liter offering with horsepower

British Columbia to the transport of cement for

at New River Valley, but manufacturing was

ranging from 325 to 405, which was introduced

the rebuilding program along the US Gulf Coast

negatively impacted by the capacity limits of

during 2006 and which met the emission regu-

following Hurricane Katrina, as well as thou-

suppliers in delivering key components.

lations then in force. The 13-liter, 415–485 hp

sands of other assignments. During 2006,

Plans were announced in the fourth quarter

MP 8 engine – available only in a US’07 compli-

nearly one in every three heavy-duty construc-

to downsize the workforce in the North

ant version – was released to customers follow-

tion trucks sold in the US carried the Mack

American production facilities. This move was

ing the January 2007 implementation of the

Granite name, and more than 55,000 Granite

part of preparations ahead of an anticipated

new emissions regulations.

Business areas 2006

Also in early 2007, Mack introduced the

nies – provides support and assistance regard-

US’07 compliant version of its popular low-

ing the availability of spare parts and service.

cab-over-engine models for the refuse and

These include MV Preferred and Mack Credit

concrete industry.

Card offerings, which simplify the purchase of

Mack offered its concrete customers an

spare parts and service repairs, while simultan-

important safety improvement in 2006 with

eously providing customers with tools for

the introduction of the Mack Road Stability

reporting, monitoring and controlling costs.

Advantage (RSA) system for concrete mixers.
Designed to reduce the potential for rollover

• Manage the challenges throughout operations arising from the market cycle, while
maintaining profitability and cost control.

• Maintain high pace of activity in the
development of alternative drivelines.
• Further development of dealer network.

• Hybrid Mack Granite model delivered to U.S.
Air Force as part of joint development program.
• Strategic enhancement of dealer network
– particularly in Western regions of the US –
continued; dealers continued to invest in new
and existing facilities.

• Continue working with the completion of
Mack Trucks’ product renewal.
• Continue the development of the North
American dealer network to strengthen
sales, customer support and aftermarket
services.
• Continuing growth in Mack Trucks’ international operations.

Business areas 2006

61

For Renault Trucks, being innovative means simplifying driving, simplifying transport operations and simplifying the work of its customers.

Renault Trucks
– committed to customer success
Renault Trucks maintains close relations with customers and
has expert insight into their operations. The Renault truck
brand is based on three core values: innovation, efficiency and
customer care.

>>> Customer satisfaction, the development

the added value they offer their customers

of services, growth and competitiveness are

everyday.

the cornerstones of Renault Trucks’ strategic

Renault Trucks focuses on attaining high

vision: its objectives include the continued

quality throughout the service network. Product

deployment of quality transport solutions

quality is unrivalled and maintained by means

according to the key precepts of reliability,

of consistent enhancement programs.

activities with improvements made to help drivers and transport companies work better.
For Renault Trucks, being innovative means
simplifying driving, simplifying transport oper-

economy, comfort and innovation. Renault

The advantages of the fully renewed range, a

ations and simplifying the work of its custom-

Trucks is one of the market leaders in Europe

consolidated network and the development of

ers. Renault Trucks is committed to designing

and its rapid international development is now

services has been noted by customers and

and proposing ever more reliable, more sober,

opening up real opportunities for growth.

reflected in higher sales. The company also

safer, more aesthetic, more customer adapted,

The Renault Trucks product range meets the

seeks to grow through partnerships and by

more environmentally-friendly and more com-

needs of its customers by offering: reduced

building on these in an effort to attain competi-

fortable – a substantial challenge which is met

fuel consumption, constantly improved reliabil-

tive advantages and achieve sustainable profit-

by the passionate dedication of Renault Trucks

ity, a wide range of services with firm commit-

ability by adapting to changes in business con-

employees.

ments, easy maintenance products, oper-

ditions.

ational mobility and safety in its trucks.

Renault Trucks’ special brand shows clearly

Product renewal

Renault Trucks is committed to the profit-

the products’ features, their value and com-

Renault Trucks is a high-profile specialist in

able growth of its business. For the wider com-

petitive advantages, as well as the corporate

four segments: City Distribution, Regional

munity, Renault Trucks contributes a vital ser-

culture and personality. It ensures that Renault

Distribution, Construction Transport and Long-

vice to the whole economy: road transport.

Trucks retains its unique identity in the Group. It

Distance Transport. In 2006, Renault com-

Striving to be a citizen-friendly brand, it is con-

helps the company to strengthen customer

pleted the renewal of all products, a program

stantly launching products which are more

loyalty, as well as creating emotional sentiment

that met with enthusiastic customer response.

environmentally friendly and which contribute

and added value.

This program commenced just three years ago

to sustainable and responsible industrial devel-

with the Renault Master, and subsequently
Innovation

with the Mascott in 2004 (City Distribution),

Renault Trucks’ solutions match the needs and

and then with Magnum and Premium Route

develop its market shares and profitability using

the diverse expectations of professional users.

(Long-Distance Transport) in 2005 and finally

proprietary values, products and services.

In the transport, construction, environmental

with Midlum, Premium Distribution (Distribu-

opment.
In the Volvo Group, Renault Trucks seeks to

62

Renault Trucks seek to apply innovatory
technology to help people in their everyday

The phrase “Committed to customer suc-

services, trade and self employed sectors,

tion) as well as Lander and Kerax (Construc-

cess” expresses the moral contract between

Renault Trucks can offer each and every cus-

tion) during 2006.

Renault Trucks and its customers, which

tomer a made-to-measure solution which is

The past year also marked the introduction

reflects how the company’s employees view

adapted to the specific requirements of their

of the Euro 4 standard and incentive for Euro 5,

their work and how they do it. They are proud of

vehicle management.

Business areas 2006

while at the same time the sale of certain ver-

to a simple phone call. The repairer’s job is to

Number of trucks produced

sions were terminated.

help the driver to continue en route as quickly

Renault Trucks

During early 2007, this was followed by the

as possible.

introduction of a completely new vehicle –
Renault Maxity – as a complement to Renault

Piet Visser works as a driver for flower export company Hilverda De Boer, which transports fresh flowers from flower auctions in Amsterdam to customers
throughout Europe.

Volvo Trucks
– developing transport solutions
Every second, day and night, a truck arrives with its cargo. Transportation is one of the vital areas in today’s society and a result
of the needs of modern man. Volvo Trucks’ objective is to meet
these needs.

>>> A common cut flower has a “vase life” of

traffic. The trucks have a solid reputation as

The corresponding flagship for the US mar-

about one week. This means that it loses

reliable, durable, safe and cost efficient – dur-

ket is the Volvo VT series, which was launched

around 15% in value in just one day. “It is

ing their entire useful life.

important to be quick, real quick,” says Piet

Volvo’s trucks are part of a very sensitive and

Visser before jumping into the cab of his brand

refined chain of logistic events, in which unfore-

the product program was further developed

new Volvo FH.

seen stops signify major problems. This applies

and the offering broadened to include more

Piet works as a driver for flower export com-

to such everyday commodities as food and

cab variations, such as a mid-roof cab, to satisfy

pany Hilverda De Boer, which transports fresh

flowers but also for the transportation of, for

more customer segments.

flowers from flower auctions in Amsterdam to

example, coffee beans from plantations in

customers throughout Europe.

Brazil.

In terms of environment, Volvo Trucks is continuing developments within the truck sector.

Volvo Trucks supplies complete transporta-

“When we began transporting coffee two

The new engine program not only complies

tion solutions to professional and commercial

years ago, we invested in five brand new Volvo

with the new environmental legislation in

customers in more than 130 countries world-

FH’s,” says Orley de Oliviera Souza, Transrodan

Europe, but also has considerably lower fuel

wide. The largest markets are Europe and

in Brazil. Our customers demand just-in-time

consumption than its predecessors.

North America.

collection and delivery and we needed reliable

On January 1, 2007, new emission regula-

vehicles. Stand stills and delays would be dev-

tions were introduced in the US. In order to

The company has a complete product offering of medium to heavy trucks with a strong
global network of 3,000 service operations. In

astating.”

meet these regulations, Volvo Trucks launched

Product renewal within Volvo Trucks has

a completely new engine program for the North

2006, Volvo Trucks sold more than 105,000

been intensive in recent years. Volvo Trucks has

American market. Volvo I-Shift was also pre-

trucks worldwide, which is a record amount in

invested a total of more than SEK 9 billion in

sented to US customers, which is the first auto-

the company’s history.
Driving progress within the area of transpor-

product renewal and product improvement

matic Volvo gearbox to be introduced in North

over the past five years.

America.

tation is a central and strategic goal. This

The 2006 fiscal year was characterized by

During 2006, the Volvo FL and Volvo FE

includes everything from creating new con-

continued launching of new products following

were also introduced in Europe and are aimed

cepts and ideas that are based on customers’

an intensive 2005 when the new Volvo FH and

at a broader category of distribution customers,

requirements and benefits to society.

Volvo FM were introduced in Europe, Volvo VT

for example, tradesmen, fruit traders and bak-

Trucks are not profitable. Drivers are. No one
knows this better than Volvo Truck’s customers. Around the clock, goods, reputation and
profits are literally in the hands of the drivers.

in North America and a modification of Volvo

ers. For the benefit of these customers, Volvo

VM in Brazil.

Trucks has developed a completely new busi-

First out in 2006 was an upgraded version of

ness concept, which facilitates the rapid and

the flagship, Volvo FH16. It is equipped with a

simple purchase of key-in-hand trucks equipped

Volvo Trucks has a very strong global pos-

new 16-liter engine with up to 660 hp, which

with bodies, tail lift and all types of support ser-

ition, particularly with regard to long-distance

makes it the world’s most powerful mass-pro-

vices, for example, service contracts.

duced truck.

64

in 2005. With its 625 hp, the Volvo VT is the
most powerful truck in the US. During the year,

loss was recovered during the last few months
of the year and total manufacturing was at the
same level as in 2005.
In the US, manufacturing has been at a high
level and in early 2007 Volvo vehicles and
Mack highway vehicles built at the New River
Valley plant were combined in the same production line.
Ambitions 2006

Outcome 2006

Ambitions 2007

• Successful introductions and production
change-overs.

• New products were well received in
the market.

• Manage the expected sharp decrease in
demand in North America.

• Introduce engines in all trucks that meet
future emissions standards in Europe
and US.

• Good fuel economy in the new engine
program.

• Ensure production capacity for a continued
strong European market.

• Hybrid concept for heavy truck presented.

• Maintain high pace of activity in the
development of alternative drivelines.

• Continued development of dealer network
with twelve new workshops in Europe.

• Continue developing customer relations in
line with the implemented dealer strategy.

• Further development of dealer network.

• Stronger focus on communicating the
company’s core values.

Business areas 2006

65

In all of Europe there is an increased need for transports and especially between the Western and
Eastern parts of Europe, which means an increased
need for heavy trucks.

Trucks
– strong demand in 2006
The global market for heavy trucks remained at a very high level
in 2006 as a result of strong economic conditions that have
favored road transport operations in recent years.

Total market

grew by 4% and the new EU countries advan-

>>> The number of trucks sold reached record

cing a full 34%. Moreover, in Russia the number

Renault Trucks’ market share in Europe was

levels primarily in Europe and North America,

of imported trucks increased by approximately

10.6% for heavy trucks (10.7). In the medium

exceeding the previous all-time-highs reported

90%.

heavy truck segment (10–16 tons) the market

partly offset by an increase in Italy and France.

in 2005. Demand in Europe seems to be con-

In North America, the overall market for

share was 15.3% (15.8) for Renault Trucks and

tinuing on this positive trend. Particularly note-

heavy trucks (class 8) in 2006 rose 13% to

3.8% (5.3) for Volvo Trucks. The development

worthy in this respect is that the new EU mem-

348,866 (307,973), with the USA reporting

in Volvo Trucks was mainly due to lower deliver-

bers in Eastern Europe are reporting sharp

growth of 12% to 284,008 vehicles (252,792).

ies in conjunction with production change-over

increases in truck sales.

The Brazilian market retreated 9% to 39,873

for the new distribution trucks.

Developments in Asia in 2006 point to favor-

vehicles in 2006. Among the major markets in

able economic growth in several markets, with

Asia, Japan grew 6%, China 29% and India

major markets such as China and India report-

41%. In the Middle East, however, the overall

In North America Mack’s market share

ing rising sales of heavy trucks.

market fell 50%, due largely to the decline in

declined by 0.4 percentage points to 9.2%,

In Brazil truck sales declined i.a. due to such

Iran, which fell by a full 94%.

mainly due to a combination of factors related

factors as a strong domestic currency in relation to the USD, resulting in problems for key
agricultural exports.

In Russia, Volvo Trucks’ import share was
25.6%.

to product renewal activities, supply issues
Market shares

associated with record volumes and regional

In 2006, Volvo Trucks’ market share in Europe

softening in certain market segments. Volvo

In 2006 the total market in Europe 27 in-

27 was 14.2% a decrease by 0.1 percentage

Trucks’ market share in North America rose 0.3

creased by 7%, amounting to 295,038

point compared to 2005. The decline was

percentage points to 10.2%.

(276,822) vehicles, whereof Western Europe

mainly due to lower market shares in the UK,

Net sales as percentage
of Volvo Group’s sales

Net sales 1, SEK bn

Operating income1,2 , SEK bn

Operating margin1,2 , %

67%

1 Years 2004, 2005 and 2006 are reported in accordance
with IFRS and 2002 and 2003 in accordance with
Swedish GAAP. See Note 1 and 3.
2 Excluding adjustment of goodwill.

66

Business areas 2006

02 03 04 05 06
118.8
136.9
166.3
117.0
155.4

02
1.2

03
4.0

04 05 06
9.0 11.7 14.4

02
1.0

03
3.4

04 05 06
6.6 7.5 8.6

During the same period in Brazil, Volvo

happening in Eastern Europe, where new

Trucks’ market share advanced 1.7 percentage

member countries of the EU contribute sub-

points to 15.3%.

stantially. Countries outside the EU in Eastern
Europe are also developing favourably. Demand

Earnings

for transports in these countries, and thereby

Net sales for the Group’s truck operations

demand for heavy trucks, is expected to be con-

amounted to SEK 166,306 M, which adjusted

tinuously strong during 2007. In total, Volvo

for changed exchange rates corresponded to

delivered 219,931 trucks in 2006, 3% more

an increase of 7%. The increase was attribut-

than in the preceding year.

able to higher sales, primarily in Europe, North
America and South America.
Demand in North America was driven by

Buses
– new product program increases
the customer’s productivity
New modern design, new safety solutions and efficient drivelines
with reduced fuel consumption. Volvo Buses renewed much of its
product range in 2006, a product portfolio that helps customers
to increase their productivity.

>>> With today’s high fuel prices, Volvo Buses’

senger satisfaction. During 2006, the Volvo

customers’ focus is on fuel consumption. Volvo

9700 and Volvo 9900 were launched with a

Nearing peak of business cycle
The total global bus market remained at a high

has chosen the SCR (Selective Catalytic

new exterior design and with a broad range of

level in most parts of the world in 2006, but

Reduction) technology to meet the new emis-

interior design options. Volvo Bus was also first

there are signs that globally the business cycle

sions standards, primarily because fuel con-

in the bus world to introduce front underrun

in the bus industry is now nearing its peak and

sumption is then lower. Combined with

protection that reduces the risk of injuries to

will soon turn downward. However, economic

improvements in gearboxes and drive shafts,

drivers and passengers in an automobile in a

growth in Asia remains strong and bus sales

fuel costs are reduced for customers.

frontal collision with a bus.

continue to rise in many countries.

Volvo Buses is a leader in environmentally

The 7700 city bus was also redesigned and

sound engines. Already today, customers can

equipped with a new 9-liter engine, which pro-

Calculating lifecycle costs

purchase Volvo engines meeting emissions

vides for more comfortable and efficient driving

The trend toward larger bus operators contin-

standards that are not proposed to become

in city traffic.

ues. They are focusing increasingly on lifecycle

effective until 2009. In addition, a new gas

During the year, Volvo Buses introduced its

engine with very low emission levels was

first city bus in India. The city of Bangalore pur-

released during the year, an engine that can

chased 50 modern, air-conditioned city buses

operate on biogas from renewable energy

with low entry.

sources.
In the coach segment, a stylish exterior and
interior design of the bus is important for pas-

costs. Which increases the demand for fuel
economy, quality and aftermarket services.
Regional authorities place high demand with
regard to the environmental impact of buses.

Volvo Buses’ subsidiary in Canada, Nova Bus,

As a result, an increasing number of bus manu-

launched an articulated version of its city bus

facturers are conducting research and devel-

Nova LFS during the year.

oping buses with alternative drivelines and for
alternative fuels.

Net sales as percentage
of Volvo Group sales

Net sales1, SEK bn

7%

1 Years 2004, 2005 and 2006 are reported in accordance
with IFRS and 2002 and 2003 in accordance with
Swedish GAAP. See Note 1 and 3.
2 Excluding write-down of shares in Henlys Group 2003
and 2004.

68

Business areas 2006

Operating income (loss)1,2 , SEK M

0

02 03 04 05 06
14.0 12.0 12.7 16.6 16.9

Operating margin1,2 , %

0

02 03 04 05 06
(94) (361) 253 470 633

02 03 04 05 06
(0.7) (3.0) 2.0 2.8 3.8

High deliveries in China
Volvo delivered 10,360 buses and bus chassis

Operating income rose from SEK 470 M to

(10,675) in 2006. Higher sales were reported

earnings are attributable to better product and

mainly in North America, South America and

market mixes and increased cost awareness

Asia. During the year, 1,300 of an order for

resulting in more efficient production methods

2,000 midi-buses were delivered to Shanghai

as well as increased use of components that

in China.

are common with Volvo Trucks. Operating

Volvo Buses market shares were strength-

Number of vehicles delivered

SEK 633 M . Among other factors, the stronger
Western Europe
Eastern Europe
North America
South America
Asia
Other markets
Total

2004

2005

2006

3,073
344
1,388
624
2,341
462
8,232

3,385
338
1,546
2,297
2,554
555
10,675

3,246
324
1,741
1,170
3,349
530
10,360

income included a positive effect of SEK 47 M

ened in, for example, Mexico, China and North

following settlement of a dispute regarding

Net sales per market

America. In contrast, the business area lost

export credits in Brazil.

Mkr

market shares in Europe, due mostly to
intense price competition. However, Volvo

New body plant in India

Buses is still the market leader in the Nordic

Volvo produced 10,440 buses and bus chassis

region and the UK.

(10,406) in 2006. The company decided during

Europe
North America
South America
Asia
Other markets
Total

2005

2006

6,948
7,142
2,960
4,247
521
2,641
1,632
1,612
661
947
12,722 16,589

2004

7,509
4,910
1,537
2,003
897
16,856

the year to start a joint-venture company in
Improved earnings

India that will build a plant in the country for

Net sales in 2006 were largely unchanged

production of bus bodies, primarily for the

compared with a year earlier, SEK 16,856 M

Indian market.

(16,589).

Ambitions 2006

Outcome 2006

Ambitions 2007

• Continue the implementation of the
earnings-improvement program.

• The improvement program resulted in
increases efficiency in sales and the industrial system globally.

• Continue the implementation of the earnings-improvement program within Volvo
Buses.

• A reduction in product costs through such
measures as increased standardization and
enhancement of the production process.

• Production processes have been simplified
and result in shorter production times.

• Renewal of the engine program to meet the
requirements of Euro 4 and Euro 5.

• All new engines for Euro 4/Euro 5 are in
production.

• Improved customer service through
expanded cooperation with dealers and
service centers.

• Nearly 100 of Volvo Trucks’ service centers
in Europe were selected to also be able to
provide service for the buses’ bodies.

• Shorten lead times from order to invoicing.
• Further strengthen positions in China and
India.
• All employees shall be involved in the
Operational Development program.

Business areas 2006

69

The new L350F is Volvo’s largest wheel loader so far.

Construction Equipment
– increased sales and
enhanced profitability
Volvo Construction Equipment has grown considerably in recent
years. Customers from all parts of the world have shown their
appreciation of Volvo CE’s comprehensive investments in new
products and the company can currently offer one of the most
modern product ranges in the industry.

>>> In addition to the actual equipment, Volvo

Growing total market

Industry trend

CE offers such services as financing, spare

Market conditions were once again favorable in

The trend in the global industry for construction

parts, used equipment, renovated spare parts

2006. The total market for Volvo CE’s product

equipment has been highly intensive in recent

and equipment, service agreements, tools and

segments rose by 10%. The market declined by

years. Suppliers, manufacturers and dealers

the opportunity to rent machinery and equip-

4% in North America and rose by 11% in

are working hard to satisfy very high customer

ment.

Europe, while other markets rose by 21%. The

demands. In certain cases, this resulted in a

growth was attributable to overall positive busi-

shortage of components and raw materials,

ness conditions for the industry.

such as tires and steel, leading in turn to long

As a result of the renewed and expanded
product offering, new customer segments are
reached. The recently launched excavators for

Public and private investments in infrastruc-

demolition and forest work are excellent ex-

tural projects contributed to the sales increase

delivery times.
More stringent rules regarding exhaust

amples of how the company is approaching

for heavy construction machines. The North

emissions and noise, combined with lower fuel

additional market segments.

American market for heavy construction

consumption and reduced operating expenses,

Volvo CE’s products and services are offered

machines grew by 3%, while the European

have forced the industry to invest more in

in more than 125 countries worldwide through

market increased by 15%. Other markets rose

research and development in these areas. For

proprietary or independent dealerships.

22%.

many types of machines, the cost of fuel

Rental is the segment of the industry that is

During 2006, the total market for compact

accounts for one third of the annual operating

growing fastest, and Volvo CE currently has

construction equipment increased by 6%,

expenses, although it can be as high as 50%

nearly 135 rental outlets, primarily in North

compared with the preceding year. The North

for certain machines.

America and Europe.

American market decreased by 8% while the
European market rose by 9%, and other markets grew by 20%.

Net sales as percentage
of Volvo Group sales

Net sales1, SEK bn

Operating income1, SEK bn

Operating margin1, %

16%

1 Years 2004, 2005 and 2006 are reported in accordance
with IFRS and 2002 and 2003 in accordance with prevailing
Swedish GAAP. See Note 1 and 3.

70

Business areas 2006

02 03 04 05 06
21.0 23.2 29.4 34.8 40.6

02
0.4

03
0.9

04
1.9

05 06
2.8 3.9

02
1.9

03
3.9

04 05 06
6.5 7.9 9.6

Increased deliveries

capacity utilization and good control of selling

Net sales per market

Volvo Construction Equipment increased deliv-

and administrative expenses, as well as to

SEK M

eries in 2006. For example, Volvo’s deliveries of

active price management.

excavators rose by 20%. The high deliveries
were the result of new products and improved

Acquisitions

Europe
North America
South America
Asia
Other markets
Total

2004

2005

2006

13,453
8,601
922
4,961
1,423
29,360

15,524
10,337
1,238
5,717
2,000
34,816

18,759
11,280
1,358
6,903
2,264
40,564

distribution. The number of machines sold dur-

In September 2006, Volvo CE announced its

ing 2006 increased by 11% to a record level

intention to acquire the equivalent of 70% of

of more than 37,000 units.

the shares in Shandong Lingong Construction
Machinery CO (Lingong), a major Chinese manu-

intense competition. Lingong, which had a

Strong earnings trend

facturer of construction equipment with an

share of 11% of the Chinese market for wheel

Volvo CE’s net sales rose by 17% to SEK

extensive network of dealers in China. The

loaders in 2005, is a technologically advanced

40,564 M (34,816). Adjusted for exchange-

acquisition was finalized in January 2007.

company with very modern production plants.

rate effects, the increase was 17%. The in-

China is the world’s second largest market

crease was attributable mainly to higher vol-

for construction equipment and the world’s

Products

umes,

largest market for wheel loaders. The Chinese

Products launched in 2006 included the

market is expected to grow additionally, and

L350F, a new wheel loader. Equipped with a

Volvo CE intends to participate actively in this

16-liter Volvo diesel engine, the L350F is the

improved

distribution

and

an

advantageous product and market mix.
Operating income improved by 41% during
the year to SEK 3,888 M (2,752), representing

growth.

largest wheel loader in Volvo’s history, which
means that the company can approach new

• The cost of sales and administration was kept on
a constant level in spite of increased activity level.

• Continued upgrade of the industrial system
to satisfy customer demand.

• All Volvo Construction Equipment dealers
are participating in the “Partnership
Development Program”.

• Focused strategy for India and Russia.

• Capitalize on investments made in Korea,
China and Germany.
• Continue to focus on the after-market and
on rental operations, as well as reduce
expenses for sales and administration.
• Continue the dealer development program.
• New products and services for new segments and customers.

• Product launches in new segments, such as
demolition and forest work.

customer segments.

• Growth within services.
• Continued focus on tools in order to reach
new segments and customers.

Business areas 2006

71

With forward-facing propellers and steerable drive
units, Volvo Penta IPS represents an entirely new
concept in the marine industry.

Volvo Penta
– innovative tradition
Volvo Penta was founded in 1907 in conjunction with the production
of the first marine engine, B1. Pentaverken soon became an established engine manufacturer, which in 1927 delivered the engine
to Volvo’s first passenger car. Volvo acquired Pentaverken in 1935
and Volvo Penta has been part of the Volvo Group since then.

>>> Volvo Penta has written marine history

can reduce installation times by up to 75 percent

North America, while demand for industrial

through a number of pioneering innovations,

compared with traditional straight shafts, which

engines was more stable. The total market in

such as the Aquamatic drive and the counter-

facilitates more efficient production. At the same

Asia remained weak, due primarily to the low

rotating Duoprop propellers, both of which are

time, the boat builder can offer the end customer

demand for diesel gensets in China. In contrast,

among the marine industry’s most important

a quieter and cleaner boat, with up to 30 per-

the development on markets in other parts of

innovations in history.

cent lower fuel consumption as well as signifi-

the world was positive, for example, Turkey and

cantly improved performance and maneuver-

South Africa.

In recent years, Volvo Penta IPS, the drive
system with forward-facing propellers, and the
joystick, are recognized in the same fashion as
radical innovations in the way to propel boats.
Creates competitive advantages

ability.
Volvo Penta works in the same fashion with

New market shares

its industrial engine customers. By creating

Volvo Penta continued to capture market

customer benefits, such as shorter installation

shares in most areas of its operations, particu-

times, improved fuel economy, environmental

larly the inboard market, in which the volumes

The IPS system is a clear example of how prod-

features and performance backed by global

for Volvo Penta IPS increased steadily. At year-

uct development contributes to creating com-

service support, Volvo Penta contributes to

end, there were slightly more than 100 boat

petitive advantages for Volvo Penta’s custom-

enhanced competitiveness for customers, such

models from the world’s largest boat builders

ers, for example, such world-leading boat

as Kalmar Industries and Atlas Copco.

with the new drive system.

Cranchi, Sessa Marine, Azimut, Tiara, Four

Strong market in Europe

powered gensets are the predominantly most

Winns, Mustang and Intermarine.

The total European market for marine as well as

important product for Volvo Penta, which dur-

industrial engines was strong in 2006. The

ing the year strengthened its global market

total market for marine engines weakened in

shares in this segment.

builders as Bavaria, Beneteau/Jeanneau,

By installing the IPS system, boat builders

Net sales as percentage
of Volvo Group sales

In the industrial engine segment, diesel-

Net sales1, SEK bn

Operating income1, SEK M

Operating margin1, %

4%

1 Years 2004, 2005 and 2006 are reported in accordance
with IFRS and 2002 and 2003 in accordance with
Swedish GAAP. See Note 1 and 3.

72

Business areas 2006

02
7.7

03
7.6

04
9.1

05 06
9.8 10.5

02 03 04 05 06
647 695 940 943 1,002

02
8.4

03 04 05 06
9.1 10.4 9.6 9.6

Penta is now focusing on benefiting from the

Financial development

Electronics improves boating life

Volvo Penta’s financial development through-

In recent years, Volvo Penta has moved to the

Group’s new generation of diesel engines for

out the current decade is characterized by

forefront to introduce electronics into the

further growth in the industrial engine busi-

sales growth and high profitability. This trend

marine industry. End customers benefit

ness. This will occur partly through strong
growth in the core segment, diesel-powered

continued in 2006. Sales of SEK 10,485 M and

through customer value in the form of cleaner

operating income of SEK 1,002 M are the high-

and quieter engines and better performance

gensets, as well as through a broader customer

est ever in Volvo Penta’s history. Operating mar-

while at the same time boat builders can

base within various types of mobile applica-

gin for the full year amounted to 9.6% (9.6).

enhance the efficiency of their production.

tions, such as terminal forklifts, stone crushers

Capacity increase in Vara

tionality, for example Volvo Penta’s new joystick

Electronics also facilitate a new type of funcTo meet the increased demand for the own-

that makes docking of boats significantly eas-

developed D4 and D6 marine engines, SEK

ier and safer. Volvo Penta is the only company in

100 M was invested in the Vara plant, which

the leisure boat industry that can currently offer

resulted in increased capacity to about 18,000

this function.

engines annually. During the past five years,
Volvo Penta has invested about SEK 800 M in

Market fundamentals remained strong in 2006.
World airline passenger traffic increased by 4.5%
in 2006.

Volvo Aero
– skilled business partner
Volvo Aero offers its customers and partners responsibility for the
development and manufacture of advanced engine components
for aircraft and space rockets. Volvo Aero’s technologies, including a world-leading role in lightweight structures which is an
expertise that is increasingly in demand in the aerospace industry
and which contributes to Volvo Aero’s greater involvement in new
aircraft engines.
Specialized competence

• Ambition partially achieved, but continued
dialog with politicians and authorities are
required to come to a longer-term solution.

• New development assignments for the
RM12 Gripen engine.
• Increase after-market volumes and profitability.

• Delivery target fulfilled

• Goal partially fulfilled, but profitability still
unsatisfactory. This was one of the reasons
why Volvo Aero decided to close the engine
overhaul operations in Bromma.

• Fulfill commitment in the development and
manufacture of the new GEnx engine.
• Expand Volvo Aero’s component business.
• Increase volumes and improve profitability
in the aftermarket.

Business areas 2006

75

Ragnesands Bus company chooses Volvo Financial
Services to fulfill its financing and service agreement
needs.

Financial Services
– essential to the overall offering
Financial solutions are vital to the Volvo Group. They increase
customer satisfaction, competitive benefits, profitability and
growth. Financial Services offers traditional financial services
such as installment contracts, operating and financial leasing and
dealer financing. In many markets, insurance and rental services
and other offerings are also available.

>>> At its heart, a successful finance company

Market growth

is about relationships. Financial Services finds

Commercial Focus (CF), the strategic initiative

ample, investments were made in a new head
office for Volvo 3P and Volvo Powertrain, both

this to be true in each of its nearly 60 markets.

launched in 2005, made it possible for Financial

in Lundby, Göteborg. Non-strategic properties

Thus the year 2006 was characterized by

Services to better capitalize on existing growth

were divested or prepared for divestment dur-

intense efforts to align Financial Services more

possibilities. The CF initiative is a centralized

ing the year. The occupancy rate at the end of

closely with its customers’ operations. For

business strategy that was formed to provide

2006 was 99.7% (99.9), and 49% (52) of the

example, new customer finance companies

high quality financial solutions by utilizing

leases was to external tenants and 89% (81) of

were started or approved in the emerging mar-

knowledge and experience from local and

the leases extends for five years or more.

kets of China, Hungary and Slovakia. In Europe,

international business teams. The goals are to

Volvo Treasury, the Group’s internal bank,

a new regional structure to improve synergies,

integrate Financial Services’ activities more

coordinates the Group’s global funding strategy

transparency and availability was introduced.

closely with the sales processes of the busi-

and financial infrastructure. It is also respon-

The US sales organization was strengthened

ness areas, enhance the depth and breadth of

sible for the management of all interest-bear-

and restructured based on product categories.

the product offering and develop the supply of

ing assets and liabilities and the execution of

At the end of 2006, management of the real

services to key accounts.

foreign exchange transactions. Volvo Treasury

estate and banking operations was transferred

Within the Danafjord real estate unit, a num-

experienced strong earnings in 2006, with

to AB Volvo, which meant that the business

ber of projects were started aimed at meeting

significant value creation in management of

area is solely a financial service operation from

the Volvo Group’s growing need for office

assets and in foreign exchange transactions.

2007.

premises and lighter duty properties. For ex-

Credit portfolio,
net1, SEK bn

Operating
income1, SEK M

Return on shareholders’ equity1, %

Market penetration2 , %

Penetration by business area2 , %

2005
2006

02 03 04 05 06
61.3 60.1 64.3 78.8 76.7

02 03 04 05 06
490 926 1,365 2,033 2,301

1 Years 2004, 2005 and 2006 are reported in accordance with IFRS and
2002 and 2003 in accordance with Swedish GAAP. See Note 1 and 3.

Corporate
Governance
During 2006, the Board
focused specifically on
issues pertaining to the
Volvo Group’s strategy with
regard to Asia. The Board
has also decided to renew
the financial targets for the
Volvo Group.

The Board at a visit to the Volvo Truck
plant in Gent.

78

Corporate Governance 2006

Corporate bodies in
corporate governance
>>> The governance and control of the Volvo
Group is carried out through a number of corporate bodies. At General Meetings, the shareholders exercise their voting rights with regard,
for example, to the composition of the Board of

Swedish Code of Corporate Governance
Volvo applies the Swedish Code of Corporate
Governance (“the Code”).
Between January 1, 2006 and December
31, 2006 Volvo did not deviate from any of the
Code’s regulations that were applicable during
this period, with the exception of paragraph

Directors of AB Volvo and election of external

4.2.1. The exception is that Tom Hedelius is

auditors. An Election Committee proposes

member of the remuneration committe even

candidates to serve as Board members, Board

though he is not, according to the Code, inde-

Chairman and external auditors. The Board is

pendent in relation to the company and the

responsible for the Group’s long-term development and strategy as well as controlling and
evaluating the company’s operations. In addition, the Board appoints the President of AB
Volvo, who is also the Chief Executive Officer
(CEO). The duties of the Board are partly exercised through its Audit Committee and its
Remuneration Committee. The CEO is in
charge of the daily management of the Group in
accordance with guidelines and instructions
provided by the Board.
The CEO is in charge of the daily management
of the Group through primarily two different
organs, the Group Executive Committee and
the business areas Boards of Directors. The
Group Executive Committee comprises those
who report directly to the CEO. At 2006 yearend, there were 17 Group Executive Committee
members including the CEO and comprised
Presidents of the Group’s eight business areas
as well as President of Volvo Powertrain business unit, who is also the Technical Director
for the Volvo Group. The Group Executive
Committee also includes the Executive Vice
President, who is also the Deputy CEO, Chief
Financial Officer and Heads of the Group’s
staff units. Meetings, which are led by the CEO,
deal with Group-wide issues and issues affecting more than one business area, and supply
information concerning the Group’s performance. The CEO or the Deputy CEO is the
Chairman of the Board for the Boards of all
business areas and these comprise mainly of
other members of the Group Executive
Committee. The Boards of the business areas
effect control and follow-ups of business areas’
financial development, business plans and
goals as well as make decisions regarding, for
example, investments.

company management.
This corporate governance report has not
been reviewed by the company’s auditors.
Nor have the company’s auditors reviewed the
Board’s report concerning the organization
of internal control with regard to financial
reporting.
Election Committee
The Election Committee is the shareholders’
body responsible for submitting to the Annual
General Meeting the names of candidates to
serve as Chairman and other members of the
Board, the fees to be paid distributed among
the Chairman, other members of the Board and
any remuneration for work on the Board’s committees. In the years in which election of auditors for Volvo shall be held, the Election
Committee presents proposals for election of
auditors and audit fees to be paid based on the
preparations carried out by Volvo’s Audit
Committee.
In conjunction with the Election Committee
proposing candidates for Chairman and the
other members of the Board, the Election
Committee shall comment on whether those
persons who are proposed are to be considered as independent in relation to the company and company management as well as to
large shareholders in the company. The Election
Committee’s proposal shall be presented to
Volvo in sufficient time to be able to be included
in the notice of the Annual General Meeting
and at the same time on Volvo’s web site.
The Election Committee, which was appointed at Volvo’s Annual General Meeting in 2006,
comprised Volvo’s Chairman Finn Johnsson,
Eva Halvarsson, representing the Second Swedish National Pension Fund, Björn Lind, representing SEB Funds, Curt Källströmer, repre-

senting Svenska Handelsbanken and Thierry
Moulonguet, representing Renault SA. The
Election Committee internally selected Curt
Källströmer as Chairman. The work of the
Election Committee is governed by the instructions approved by the Volvo Annual
General Meeting in 2006. In November, 2006

4,775,000 to be distributed among the Board
Members according to the following. The
Chairman of the Board receives a fee of SEK
1,350,000 and the remaining members a total
of SEK 2,700,000 to be distributed among the
members as the Board decides. In addition, the
Chairman of Audit Committee shall receive

Lars Förberg representing Violet Partners LP,

SEK 250,000 and the other two members of

became member instead of Eva Halvarsson.

the Audit Committee SEK 125,000 each and

Violet Partners LP replaced the Second

the members of the Remuneration Committee

Swedish National Pension Fund as the fourth

SEK 75,000 each.

largest shareholder, by votes, in Volvo. Eva
Halvarsson was at the same time co-opted
onto the Election Committee.
The Election Committee’s proposal for the
2007 Annual General Meeting will be provided
on Volvo’s website.

During the year, the Board reviewed the
business plans and strategies for the various
businesses in the Volvo Group. In addition
thereto, the Board reviewed the financial positions of AB Volvo and the Volvo Group on a
regular basis and acted in order to ascertain
that there are efficient systems in order to follow-up and control the business and financial
position of the Volvo Group. In connection
therewith, the Audit Committee is responsible
for preparing for the Board’s work through
quality assurance of the company’s financial
reporting through reviewing the interim reports
and the annual report. The Board has met with
the company’s auditors during 2006. The
Board has continuously evaluated the performance of the CEO.
During 2006, the Board focused specifically
on issues pertaining to the Volvo Group’s strategy with regard to Asia and thereby decided to
acquire shares in Nissan Diesel Motor Co Ltd
and on initiating discussions on the commercial
operation Dongfeng Motor Co Ltd. During the
year, the Board also discussed and decided to
renew the financial goals for the Volvo Group.
In addition, the Board also dealt regularly with
matters involving other divestments, acquisitions and the establishment of new operations,
and matters related to investments in product
renewal and product development in the
Group’s business areas.
The Board’s work is mainly performed
through Board meetings and through meetings
in the respective committees of the Board. In
addition thereto, the chairman of the Board is in
regular contact with the CEO in order to discuss on-going business and to ensure that the
decisions taken by the Board are executed. An
account of each Board member’s age, education, main professional experience, other board

The Board
In 2006, AB Volvo’s Board of Directors consisted of eight members elected by the Annual
General Meeting. In addition, the Board had
three members and two deputy members
appointed by employee organizations. The CEO,
Leif Johansson, was a member of the Board.
During 2006, six regular meetings and two
extraordinary meetings were held.
The Board has adopted work procedures for
its activities that contain rules pertaining to the
distribution of work between the Board members, the number of Board meetings, matters to
be handled at regular meetings of the Board
and duties incumbent on the Chairman. In addition thereto, the work procedures contain
directives concerning the tasks of the Audit
Committee and the Remuneration Committee
respectively. The Board has also issued written
instructions specifying when and how information required to evaluate the company’s and
Group’s financial position should be reported to
the Board as well as the distribution of duties
between the Board and the President and in
what circumstances the Executive Vice President and Deputy CEO is to substitute for the
CEO.
The Annual General Meeting decides on the
fees to be paid to the Board members elected
by the shareholders. The Annual General
Meeting held on April 5, 2006 approved a total
fee to the Board, for the time until the end of the
next Annual General Meeting, of SEK

The Board’s composition and attendance at meetings January 1, 2006
to December 31, 2006.
Audit
Board Committee

1 Elected to the Board at the 2006 Annual General
Meeting.
2 Resigned from the Board in conjunction with the
2006 Annual General Meeting.

memberships, ownership of shares in Volvo and
the years of membership on the Volvo Board is
presented on pages 84 and 85.
During 2006, the Board performed its yearly
evaluation of the Board’s work. The Chairman
has informed the Election Committee on the
result of the evaluation.
Independence requirements
The Board of Directors of Volvo must meet
independence requirements pursuant to the
rules of the Stockholm Stock Exchange, the
Code and NASDAQ’s regulations, as well as
the Sarbanes-Oxley Act (SOX). Below follows a
short description of the rules of the Stockholm
Stock Exchange and the Code. The independence requirements mainly mean that only one
person from the company’s management may
be a member of the Board, that a majority of the
Board shall be independent of the company
and the company management and that at
least two of the members that are independent
from the company and the company’s management shall also be independent of the company’s major shareholders. In addition, the

Corporate Governance 2006

79

Code demands that a majority of the members
in the Audit Committee shall be independent of
the company and that at least one member
shall be independent of the company’s major
shareholders. With regard to the Remuneration
Committee, the Code sets the requirement that
members of the Remuneration Committee,

ble for preparing the Board’s work through
quality assurance of the company’s financial
reporting through reviewing the interim reports
and the annual report. In addition, the Audit
Committee’s task is to establish guidelines
specifying what other services than audit the
company may procure from the company’s

In 2006, the Remuneration Committee comprised Board members Tom Hedelius, Louis
Schweitzer and Finn Johnsson, Chairman. The
Remuneration Committee held four meetings
during the year.

with the exception of the Board chairman if a

auditors and to provide guidelines for and deci-

An account of their respective age, education,

member of the Remuneration Committee, shall

sions on transactions with companies and per-

Board memberships, ownership of shares in

be independent of the company and company

sons closely associated with Volvo. The Audit

Volvo, and year of joining Volvo for the CEO

management.

Committee is also responsible for evaluating

and each member of the Group Executive

Considering the above demands regarding
the Board’s independence, the Election
Committee has reported to the company the
following understanding about the independence from the company and the company management as well as the company’s largest
shareholders with regard to the Board members who were elected at the Annual General
Meeting in 2006:
Finn Johnsson, Peter Bijur, Philippe Klein,
Louis Schweitzer and Ying Yeh are all independent from the company and company management.
Leif Johansson, as Volvo’s CEO, is not independent of the company and company management.
Tom Hedelius and Per-Olof Eriksson have
been members of the Board of Volvo since
January 19, 1994. Accordingly, they have been
members for more than 12 years and consequently, in accordance with the Code, are not to
be considered independent of the company
and company management.
Philippe Klein and Louis Schweitzer are
employee and Chairman of the Board respectively of Renault SA and represent Renault SA
on the company’s Board of Directors. Since
Renault SA controls more than 10% of the
shares and votes in Volvo, these persons may
not, pursuant to the Code, be considered as
independent in relation to one of the company’s
major shareholders.

the internal and external auditors’ work as well
as to provide the Election Committee with the
results of the evaluation and to assist in preparing proposals for auditors.
Up to the 2006 Annual General Meeting, the
Audit Committee comprised Board members
Haruko Fakuda, Ken Whipple and Per-Olof
Eriksson, Chairman. After the Annual General
Meeting in 2006, the Audit Committee comprised Board members Peter Bijur, Ying Yeh
and Per-Olof Eriksson, Chairman. During 2006
the Audit Committee held three regular meetings and one extraordinary meeting.
The Audit Committee met with the external
auditors and Head of Internal Audit at the ordinary meetings. The Audit Committee has also
met with the external auditors without the presence of the company management.

Committee is presented on pages 82 and 83.

Audit Committee
In December 2002, the Board established an
Audit Committee primarily for the purpose of
overseeing the accounting and financial reporting processes and the audit of the financial
statements. The Audit Committee is responsi-

80

Group Executive Committee

Corporate Governance 2006

Remuneration Committee
In April 2003, the Board established a
Remuneration Committee primarily for the purpose of preparing and deciding on issues relating to remuneration to senior executives in the
Group. The duties of the Committee include
presenting recommendations for resolution by
the Board regarding terms of employment and
remuneration for the President and Executive
Vice President of AB Volvo, principles for remuneration, including pensions and severance
payment for other members of the Group
Executive Committee, and principles for variable salary systems, share-based incentive
programs, pensions and severance payment
for other senior executives in the Group. In
addition, the Remuneration Committee decides
the individual terms of employment for the
other members of the Group Executive
Committee in accordance with the principles
established by the Board.

External auditing
Volvo’s auditors are elected by the Annual
General Meeting, for a period of three or four
years. The current auditors were elected at the
2003 Annual General Meeting and the next
election of auditors will be at the 2007 Annual
General Meeting. Volvo’s auditor is PricewaterhouseCoopers AB (“PwC”). Two PwC partners,
Göran Tidström and Olov Karlsson, are responsible for the audit of Volvo. Göran Tidström is
the Lead Partner.
The Auditors report their findings to the
shareholders through the audit report, which
they present to the Annual General Meeting of
the shareholders. In addition, the auditors
report detailed findings from their review to the
Audit Committee and, once a year, to the full
Board of Directors.
In addition to the audit, PwC also provides
certain services to Volvo. In 2006 such services included advice on the company’s
extended procedures for testing and reporting
of internal controls, in accordance with SOX,
Section 404, which is mandatory for the first
time in 2006. PwC also provides tax advice and
other audit-related services to Volvo. When
PwC is retained to provide services other than
the audit, it is done in accordance with rules
decided by the Audit Committee pertaining to
pre-approval of the nature of the services and
the fees. Volvo believes that the provision of the
additional services does not jeopardize PwC’s
independence.
For more detailed information concerning
auditor’s fees see Note 35 of the notes to the
consolidated financial statements.

The Board at a visit to Volvo Construction
Equipment in Shanghai.

The organization of the internal
control over financial reporting
Volvo has had internal control processes for a
long time.
Volvo applies internal control principles
introduced by the Committee of Sponsoring
Organizations of the Treadway Commission

The intention is to publish the Form 20F in
May 2007.
Disclosure Committee
A Disclosure Committee was established in
2004. The Committee contributes to ensuring
that Volvo fulfills its obligations according to

(COSO). The COSO principles consists of five

applicable legislation as well as to listing rules to

interrelated components where a number of

timely disclose to the financial market all mater-

objectives have to be met in each component.

ial information that affects the share price.

The components are: control environment, risk

The Committee comprises the heads of the

assessment, control activities, information and
communication and monitoring.
Volvo has an internal audit function of which
the main responsibility is to ensure adherence
to the internal control system that the company
applies. The Head of Internal Audit reports
directly to the CEO and CFO and has a dotted
reporting line to the Audit Committee of the
Board of Directors.
During 2005 and 2006, Volvo continued its
efforts that were initiated in 2004 in terms of
reviewing and documenting relevant processes
for the purpose of ensuring that the internal
control of the financial reporting functioned
satisfactorily and was well documented. In
2006, the work was finalized and the relevant
processes were tested.
Since AB Volvo’s Series B shares are registered with the Securities & Exchange Commission (SEC) in the US, Volvo must comply with
Sarbanes-Oxley Act (SOX). SOX section 404
requires that Volvo submit a report from Volvo’s
CEO and CFO regarding Volvo’s internal control over the financial reporting, in conjunction
with the presentation of the US Annual Report,
Form 20F, for 2006. The report, which is part of
the Form 20F, will include a statement regarding the outcome of the company’s evaluation of
the effectiveness of the internal control over
the financial reporting for the 2006 year-end.
The report will also include a statement from
the CEO and CFO on whether the internal control over the financial reporting is effective or
not, and a statement on which internal control
system that was used to evaluate the effectiveness. If any material weaknesses in the internal
control of the financial reporting are identified
these will be described in the report. PwC will
submit an auditor’s statement pertaining to the
internal control of the financial reporting.

departments, Corporate Finance, Internal Audit,
Investor Relations, Corporate Legal, Business
Control and Financial Reporting.
Principles for remuneration and other
employment terms for the Group
Executive Committee
The Annual General Meeting of 2006 decided
upon principles for remuneration and other
employment terms for the members of Volvo’s
Group Executive Committee (“Remuneration
Policy”) in accordance with Section 4.2.2 of the
Code. The proposed principles for remuneration and other employment terms can be summarized as follows.
The guiding principle is that remuneration
and other employment terms for company management shall be competitive to ensure that
Volvo can attract and retain skilled persons in
the Group Executive Committee. The fixed salary may be competitive and reflect the individual’s area of responsibility and performance. In
addition to the fixed salary a variable salary may
be paid. A variable salary may amount to a maximum of 50% of the fixed annual salary and be
based on the Volvo Group’s and/or the executive’s Group company’s fulfillment of certain
improvement goals. The improvement goals are
decided by the Board of AB Volvo and may be
related, for example, to operating income or cash
flow. In addition to fixed and variable salary, normally other customary benefits, such as company car and company healthcare are provided.
In individual cases, housing and other benefits
are provided. In addition to pension benefits
provided by law and collective bargaining agreements, the members of the Group Executive
Committee domiciled in Sweden are offered a
defined-contribution pension whereby the
amount of the individual’s pension comprises

the premium paid and any return. In individual
cases, other pension solutions may be considered. Members of the Group Executive
Committee domiciled outside Sweden are
offered pension solutions that are competitive
in the country in which the person is domiciled.
With regard to notice of termination of employment for members of the Group Executive
Committee domiciled in Sweden, the notification period is 12 months if the company terminates the employment and six months if the
individual terminates employment. In addition,
the employee is entitled to a severance pay of 12
months’ salary if Volvo terminates employment.
In individual cases, other principles for notification periods and severance pay may be considered. Those members who are domiciled
outside Sweden are offered terms in this
respect that are competitive in the country in
which the person is domiciled.
A more detailed account of remuneration to
the President and principles for the remuneration to other senior executives is presented in
Note 34 to the consolidated financial statements.
At the 2007 Annual General Meeting, the
Board has decided to propose renewed guidelines for remunerations to executives. The proposal will be available on Volvo’s website.
Outstanding share- and share-pricerelated incentive programs
An account of outstanding share- and shareprice related incentive program is provided in
Note 34 to the consolidated financial statements.

Corporate Governance 2006

81

Group Management

82

Leif Johansson

Jorma Halonen

President and CEO
Born 1951. Master of Engineering. President of
AB Volvo and Chief Executive Officer of the
Volvo Group since 1997. With Volvo since 1997.
Board member: Bristol-Myers Squibb
Company, Svenska Cellulosa Aktiebolaget SCA,
Confederation of Swedish Enterprise and The
Association of Swedish Engineering Industries.
Member of the Royal Swedish Academy of
Engineering Sciences. Member of Volvo Board
since 1997. Holdings in Volvo, own and
related parties: 50,562 Volvo shares, including 43,538 Series B shares and 50,000
employee stock options.

Executive Vice President and Deputy CEO
Born 1948. Bachelor of Science in Economics.
Executive Vice President of AB Volvo and
Deputy CEO of the Volvo Group since 2004.
President of Volvo Truck Corporation 2001–
2004. Prior to that various positions at Scania
1990–2001. Member of Group Executive
Committee since 2002. With Volvo since 2001.
Vice Chairman: Nissan Diesel. Holdings in
Volvo: 4,000 Series B shares and 25,000
employee stock options.

Paul Vikner

Stefano Chmielewski

President of Mack Trucks, Inc.
Born 1949. Bachelor of Arts. President of Mack
Trucks, Inc. since 2001. Executive Vice
President of Sales and Marketing, Mack Trucks,
Inc. 1996–2001. Previously at Iveco Trucks
North America and Isuzu Trucks North America
1972–1994. Member of Group Executive
Committee since 2004. With Volvo since 2001.
Holdings in Volvo: 2,000 Series B shares.

President of Renault Trucks
Born 1952. MA Master of Science Electronics/
Automation. President of Renault Trucks since
2003. Member of Volvo Group Executive
Committee since 2003. With Volvo since 2001.
Holdings in Volvo: None.

Staffan Jufors

Håkan Karlsson

President of Volvo Truck Corporation
Born 1951. Master of Business Administration.
President of Volvo Truck Corporation since
2004. President of AB Volvo Penta 1998–
2004. Member of Group Executive Committee
since 1998. With Volvo since 1975.
Board member: EBP AB. Holdings in
Volvo: 4,208 shares, including 3,054 Series B
shares.

President of Volvo Bus Corporation
Born 1961. Master of Engineering. President of
Volvo Bus Corporation and Member of Group
Executive Committee since 2003. President of
Volvo Logistics 2000–2003. With Volvo since
1986. Holdings in Volvo: 4,442 shares,
including 4,175 Series B shares.

Tony Helsham

Göran Gummeson

President of Volvo Construction
Equipment
Born 1954. Bachelor of Engineering. President
of Volvo Construction Equipment since 2000.
President and CEO of Euclid Hitachi Heavy
Equipment 1995–1998. President of Volvo
Construction Equipment Korea 1998–2000.
Member of Group Executive Committee since
2000. With Volvo since 1985. Holdings in
Volvo: None.

President of Volvo Penta
Born 1947. President of Volvo Penta since
November 1, 2004. Has held various positions
at Volvo Penta since 1991, head of Volvo
Penta’s European operations 1998–2004.
Member of Group Executive Committee since
2004. With Volvo since 1991. Holdings in
Volvo: 6,439 Series B shares.

Olof Persson

Salvatore L Mauro

President of Volvo Aero Corporation
Born 1964. Bachelor of Business
Administration. President of Volvo Aero
Corporation since 2006. Member of Group
Executive Committee since July 1 2006. With
Volvo since 2006. Board member:
Bombardier Transportation Sweden AB.
Holdings in Volvo: None.

President of Volvo Financial Services
Born 1960. Bachelor of Science in Accounting.
President of Volvo Financial Services since
2001. President of Volvo Car Finance Europe
1999–2001. Member of Group Executive
Committee since 2001. With Volvo since 1985.
Holdings in Volvo: 1,003 American
Depositary Receipts (ADRs).

Corporate Governance 2006

Stefan Johnsson

Per Löjdquist

Senior Vice President
Born 1959. Master of Business Administration.
Senior Vice President of AB Volvo responsible
for business units and human resources.
Member of Group Executive Committee since
1998. Senior Vice President of AB Volvo and
CFO for the Volvo Group, 1998–2005.
President of Volvo Group Finance Sweden
1994–1998. With Volvo since 1987.
Board member: Stiftelsen Chalmers Tekniska
Högskola. Holdings in Volvo: 4,075 shares
including 4,000 Series B shares.

Senior Vice President
Born 1949. Senior Vice President of AB Volvo.
Member of Group Executive Committee since
1997, responsible for Corporate Communications and Public Affairs. With Volvo since 1973.
Board member: West Sweden Chamber of
Commerce and Industry and Nilörngruppen AB.
Holdings in Volvo: 8,463 shares, including
5,289 Series B shares.

Lars-Göran Moberg

Eva Persson

President of Volvo Powertrain
Born 1943. Master of Engineering. President of
Volvo Powertrain since 2001. Member of Group
Executive Committee since 2001. With Volvo
since 1995. Holdings in Volvo: 9,858 shares
including 9,652 Series B shares and 25,000
employee stock options.

Senior Vice President
Born 1953. Master of Laws. Senior Vice
President of AB Volvo and General Counsel of
the Volvo Group. Member of Group Executive
Committee since 1997, responsible for legal,
tax and security matters. With Volvo since
1988. Secretary to the Board of Volvo since
1997. Board member: Handelsbanken
Region Väst, Second Swedish National Pension
Fund. Member of the Swedish Industry and
Commerce Stock Exchange Committee.
Holdings in Volvo: 500 shares, including 248
Series B shares.

Jan-Eric Sundgren

Pär Östberg

Senior Vice President
Born 1951. Master of Engineering, PhD in solid
state Physics, Professor in materials science.
Member of Group Executive Committee since
August 1 2006, responsible for Public &
Environmental Affairs. With Volvo since 2006.
Board member: Lindholmen Science Park AB,
Meritea AB. Member of the Royal Swedish
Academy of Engineering Sciences. Holdings in
Volvo: None.

Senior Vice President
Born 1962. Master of Business Administration.
Senior Vice President of AB Volvo and CFO of
the Volvo Group since 2005. Member of the
Group Executive Committee since 2005,
responsible for finance, strategy and business
development. Pär Östberg has held various
senior positions in the financial areas in the
Volvo Group since 1990, most recently as
Senior Vice President and CFO of Renault
Trucks. Holdings in Volvo: 1,000 Series
B shares.

Fred Bodin
Senior Vice President
Born 1947. Bachelor of Laws. President of
Volvo Aero Corporation 1997–2006. General
Counsel of Volvo Group 1988–1997. Member
of Group Executive Committee since 1993.
With Volvo since 1981. Holdings in Volvo:
None.

Changes in Group Executive Committee
Michel Gigou, member of the Group Executive
Committee since 2002, retired on April 30, 2006.
Within the Group Executive Committee, Michel
Gigou’s responsibilities included Volvo’s operations
in China, a responsibility that was assumed by
Jorma Halonen.
During 2006, Volvo’s Group Executive Committee
was expanded through the addition of Jan-Eric
Sundgren, former President of Chalmers

University of Technology. Jan-Eric Sundgren’s
responsibilities include contacts with public authorities, universities and colleges. He also focuses on
technological and research-related matters within
the Volvo Group and has Group-wide responsibility
for environmental and safety issues.
Olof Persson became President of Volvo Aero
on July 1, 2006. As from this date he is also a member of the Volvo Group Executive Committee. He

succeeded Fred Bodin, who retired on February
20, 2007. Before he took on his position within the
Volvo Group, Olof Persson was President of the
Canadian aircraft and train manufacturer
Bombardier’s Mainline and Metro division for trains
and subways.

Corporate Governance 2006

83

Board of Directors and Auditors
Board members elected by the Annual General Meeting
Finn Johnsson

Peter Bijur

Chairman of the Board,
Chairman of the Remuneration Committee
Born 1946, Master of Business Administration.
Board Chairman: Luvata Oy, Thomas Concrete
Group AB, Unomedical A/S, KappAhl AB and City
Airline. Board member: Skanska AB and AB
Industrivärden. Member of Volvo Board since 1998.
Chairman since February 2004. Holdings in
Volvo: 4,000 shares including 2,000 Series B
shares.

Member of the Audit Committee
Born 1942, MBA Marketing, BA Political Science.
Board member: Gulfmark Offshore Inc. Member of
the Volvo Board since 2006. Holdings in Volvo:
None.
Principal work experience: Numerous positions with
Texaco Inc, retired as Chairman and Chief Executive
Officer in 2001.

Born 1951, Master of Engineering. President of AB
Volvo and Chief Executive Officer of the Volvo Group
since 1997. Member of Volvo Board since 1997.
Board member: Bristol-Myers Squibb Company,
Svenska Cellulosa Aktiebolaget SCA, Confederation
of Swedish Enterprise and The Association of
Swedish Engineering Industries. Member of the
Royal Swedish Academy of Engineering Sciences.
Holdings in Volvo, own and related parties:
50,562 shares, including 43,538 Series B shares
and 50,000 employee stock options.

Born 1957. Senior Vice President, CEO’s Office
Renault S A and member of the Renault
Management Committee. Member of the Volvo
Board since 2006. Holdings in Volvo: None.
Principal work experience: Various positions within
Renault (Engineer; Senior Manager, Engine
Development and Tuning; Director, Process Quality
Department in Vehicle Engineering; Vice President,
Industrial System Performance Department); Vice
President, CEO’s Office at Nissan.

Member of the Remuneration Committee
Born 1942. Bachelor of Laws.
Board Chairman: Renault, AstraZeneca Plc.
Board member: Electricité de France, BNPParibas, Véolia and L´Oréal. Member of Volvo
Board since 2001. Holdings in Volvo: 2,000
Series B shares.

Member of the Audit Committee
Born 1948, BA, Literature & International
Relations. President and Chairman of Kodak North
Asia Region. Member of the Volvo Board since
2006. Holdings in Volvo: None.

Principal work experience: Official at French Budget
Department; Chief of Staff of Mr Laurent Fabius
(Minister of Budget, then Minister for Industry and
Research, and Prime Minister), Chairman, French
Commission for Equality (since 2005); numerous positions with Renault SA (Chief Financial Officer and
Executive Vice President Finance and Planning,
President and Chief Operating Officer, Chairman and
Chief Executive Officer).

84

Corporate Governance 2006

Principal work experience: Journalist NBC, New York.
Numerous positions with the U S Government Foreign
Service in Burma, Hong Kong, Taiwan and Beijing.
Various positions with Eastman Kodak in China.

Board members and deputies appointed by employee organisations
Martin Linder

Olle Ludvigsson

Born 1973. Employee representative. With
Volvo since 1994. Member of Volvo Board
since 2004.
Holdings in Volvo: None.

Born 1948. Employee representative. With
Volvo since 1968. Deputy member of Volvo
Board 1983–1988; member since 1988.
Holdings in Volvo: 155 shares, including
105 Series B shares.

Johnny Rönnkvist

Berth Thulin

Born 1947. Employee representative. With
Volvo since 1965. Member of Volvo Board
since 1999.
Holdings in Volvo: 285 shares, including
50 Series B shares.

Born 1951. Employee representative. With
Volvo since 1975. Deputy member of Volvo
Board since 1999.
Holdings in Volvo: 100 Series B shares.

Margareta Öhlin

Secretary to the Board

Born 1947. Employee representative. With
Volvo since 1983. Deputy member of Volvo
Board since 2005.
Holdings in Volvo: None.

Eva Persson
Born 1953, Master of Laws. Senior Vice President
of AB Volvo and General Counsel of the Volvo
Group. Secretary to the Volvo Board since 1997.
Holdings in Volvo: 500 shares, including 248
Series B shares.

Auditors
PricewaterhouseCoopers AB

Göran Tidström

Olov Karlsson

Authorized Public Accountant.
Lead Partner.

Authorized Public Accountant.
Partner.

Auditor since 2006.

Auditor since 1998.

Other assignments: Auditor of Securitas, Telia
Sonera och Trelleborg. Chairman of the Board
of EFRAG (European Financial Reporting
Group) and Board member of IFAC
(International Federation of Accountants).

Parent Company
Accounting principles
Administrative expenses
Other operating income
and expenses
Income from investments in
Group companies
Income from investments in
associated companies
Income from other investments
Interest income and expenses
Other financial income and
expenses
Allocations
Income taxes
Intangible and tangible assets
Investments in shares and
participations
Other short-term receivables
Short-term investments in
Group companies
Untaxed reserves
Provisions for pensions
Non-current liabilities
Other current liabilities
Contingent liabilities
Cash flow
Financial risks and instruments
Personnel

Consolidated income statements

SEK M

2004

2005

2006

Net sales
Cost of sales
Gross income

Note 7

211,076
(164,170)
46,906

240,559
(186,662)
53,897

258,835
(199,054)
59,781

Research and development expenses
Selling expenses
Administrative expenses
Other operating income and expenses
Income from investments in associated companies
Income from other investments
Operating income

Note 7

(7,614)
(19,369)
(5,483)
(618)
27
830
14,679

(7,557)
(20,778)
(6,301)
(588)
(557)
37
18,153

(8,354)
(21,213)
(6,551)
(3,466)
61
141
20,399

821
(1,254)
(1,210)
13,036

654
(972)
181
18,016

666
(585)
(181)
20,299

(3,129)
9,907

(4,908)
13,108

(3,981)
16,318

9,867
40
9,907

13,054
54
13,108

16,268
50
16,318

23.58
23.55

32.22
32.16

40.20
40.17

Interest income and similar credits
Interest expenses and similar charges
Other financial income and expenses
Income after financial items
Income taxes
Income for the period
Attributable to:
Equity holders of the parent company
Minority interests

Translation differences
Translation differences on hedge instruments
of net investments in foreign operations
Net income recognised directly in equity
Income for the period
Total recognised income and
expense for the period

Translation differences
Translation differences on hedge instruments
of net investments in foreign operations
Note 15, 23
Available-for-sale investments:
Valuation gains/(losses) taken to equity
Change in hedge reserve
Net income recognised directly in equity
Income for the period
Total recognised income and expense for the period
Cash dividend
Repurchase own shares
Share based payments
Decrease of share capital
Other changes
Balance at December 31, 2005

Note 23
Note 34
Note 23

Note 34

24

–

–

–
–
–
–
–

–
–
–
(95)
–
2,554

Translation differences
Translation differences on hedge instruments
of net investments in foreign operations
Note 15, 23
Available-for-sale investments:
Valuation gains/(losses) taken to equity
Change in hedge reserve
Note 23
Net income recognised directly in equity
Income for the period
Total recognised income and expense for the period
Cash dividend
Share based payments
Other changes in Nissan Diesel’s equity
Other changes
Balance at December 31, 2006

The effects of major acquisitions and divestments of subsidiaries in
each year have been excluded from other changes for the balance
sheet items in the cash-flow statement. The effects of currency

90

2005

(7,405)
(4,360)

Translation difference on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents,
January 1
Cash and cash equivalents,
December 31

2004

movements in translation of foreign Group companies have also
been excluded since these effects do not affect cash flow. Cash and
cash equivalents include cash and bank balances.

Notes to consolidated financial statements
Amounts in SEK M unless otherwise specified. The amounts within parentheses refer to the preceding years, 2005 and 2004.

Note

1

Accounting principles

The consolidated financial statements for AB Volvo and its subsidiaries have been prepared in accordance with International Financial
Reporting Standards (IFRS) issued by the International Accounting
Standards Board (IASB), as adopted by the EU. Those portions of
IFRS not adopted by the EU have no material effect on this report.
This annual report is prepared in accordance with IAS 1 Presentation of Financial Statements and in accordance with the Swedish
Companies Act. In addition, RR30 Supplementary Rules for Groups,
was applied, issued by the Swedish Financial Accounting Standards
Council.
In the preparation of these financial statements, the company
management has made certain estimates and assumptions that
affect the value of assets and liabilities as well as contingent liabilities at the balance sheet date. Reported amounts for income and
expenses in the reporting period are also affected. The actual future
outcome of certain transactions may differ from the estimated outcome when these financial statements were issued. Any such differences will affect the financial statements for future fiscal periods.

nition and Measurement, pertaining to financial guarantee contracts,
the comparison year is restated. The effect on Volvo’s shareholders’
equity amounts to a negative SEK 10 M on the opening balance for
2005 and a positive SEK 2 M for the income for the 2005 period.
IFRIC 5 Rights to interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds, IFRIC 6 Liabilities
arising from participating in a Specific Market – Waste Electrical and
Electronic Equipment, have not affected Volvo’s financial position
significantly.

Changes of accounting principles
Effective in 2005 Volvo has applied International Financial Reporting
Standards (IFRS) in its financial reporting. In accordance with the
IFRS transition rules in IFRS 1, Volvo applies retroactive application
from the IFRS transition date at January 1, 2004. The general rule is
that restatement of financial reporting for periods after the transition
date should be made as if IFRS has been applied historically. All
comparison figures from 2004, in tables and the notes, have been
restated. There are certain exceptions from the general rule of which
the most significant for Volvo are:
– IAS 39 Financial instruments: Recognition and measurement
which is applicable from January 1, 2005.
– Non-amortization of intangible assets with indefinite useful lives
(e.g. goodwill) in accordance with IFRS 1 should be applied retroactively only from the transition date January 1, 2004.
The transition from Swedish GAAP to IFRS was made according
to a regulation applicable to all listed companies within the European
Union as of 2005. Refer to Note 3, Transition to IFRS for a more
detailed overview of the transition.
Refer to the 2004 Annual Report for a description of the previous
Swedish accounting principles applied by Volvo.

The supplement became effective on January 1, 2007. At this time, it
is assessed that this supplement results in increased supplementary
information, including definition of capital, capital structure and policies for management of capital.

New accounting principles in 2005
The following IFRS standards were applied as of 2005, in accordance with the respective standards transition rules or in accordance
with IFRS 1, IAS 39: Financial Instruments: Recognition and Measurement, and IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations. Neither of these standards requires retroactive
reporting. Accordingly, the comparison year 2004 is not restated
with regard to these standards. Volvo decided to early adopt the
amended IAS 39 regarding hedging of commercial cash flows, relating to intra-group forecasted transactions, from January 1, 2005.
New accounting principles in 2006
As of 2006, applies the updated standard IAS 21, Effects of
Changes in Foreign Exchange Rates, which does not have any significant effect on Volvo’s financial position. With regard to application of IFRIC 4, Determining whether an arrangement contains a
lease, and the supplement to IAS 39, Financial Instruments: Recog-

New accounting principles 2007
In preparing the consolidated accounts at December 31, 2006, a
number of standards and interpretations were published but have as
yet not become effective. The following is a preliminary assessment
of the effect implementation of these standards and statements
could have on the Volvo Group’s financial statements.
IAS 1 supplement – Presentation of Financial statements:
Information about capital

IFRS 7 Financial Instruments: Disclosure

The standard became effective as of January 1, 2007. It is assessed
that for the Volvo Group this standard requires further provision of
supplementary disclosures in the form of risk analysis linked to the
Group’s financial instruments.
IFRS 8 Operating segments*

The standard becomes effective on January 1, 2009 and applies for
the fiscal years beginning on that date. The standard addresses the
distribution of the company’s operations in different segments. In
accordance with the standard, the company shall adopt an approach
based on the internal reporting structure and determine the reportable segments based on this structure. Volvo does not expect the
adoption of IFRS 8 to result in any change in the number of segments.
IFRIC 7 Applying the Restatement Approach under IAS 29
Financial reporting in Hyperinfl ationary Economies

The interpretation became effective on March 1, 2006 and applies
to fiscal years beginning after March 1, 2006. The Group currently
does not have operations in any countries in which the transition to
high-inflation accounting applies.
IFRIC 8 Scope of IFRS 2

The interpretation became effective on May 1, 2006 and applies to
fiscal years beginning after May 1, 2006. In accordance with IFRS 8,
the rules in IFRS 2 apply to goods and services received in
exchange for own equity instruments even if these goods or services, partly or wholly, cannot be identified specifically, This statement
is not expected to be applicable to the Group since transactions of
this type does not occur.
IFRIC 9 Reassessment of Embedded Derivatives

The interpretation became effective on June 1, 2006 and applies to

*These standards/interpretations have not been adopted by the EU at this time.
Financial information 2006 91

The Volvo Group

Notes to consolidated financial statements

Exchange rates
Country

Brasil
Canada
Denmark
Euro
Great Britain
Japan
Norway
South Korea
United States

Average rate
2004

2005

2006

2004

2005

2006

BRL
CAD
DKK
EUR
GBP
JPY
NOK
KRW
USD

2.5388
5.6495
1.2285
9.1408
13.4515
0.0680
1.0926
0.0065
7.3655

3.0947
6.1864
1.2471
9.2943
13.5849
0.0679
1.1611
0.0073
7.4791

3.3927
6.5096
1.2420
9.2649
13.5822
0.0635
1.1516
0.0077
7.3791

2.5125
5.4635
1.2126
9.0163
12.7163
0.0638
1.0890
0.0064
6.6138

3.4215
6.8435
1.2651
9.4393
13.7388
0.0679
1.1770
0.0079
7.9538

3.2190
5.9235
1.2146
9.0593
13.4938
0.0579
1.0955
0.0074
6.8738

fiscal years beginning after June 1, 2006. The statement is a clarification of IAS 39 regarding embedded derivatives, mainly with regard
to assessment of embedded derivatives as a result of market conditions changing.
IFRIC 10 Interim Financial Reporting and Impairment

The interpretation became effective on November 1, 2006 and
applies to fiscal years beginning after that date. The interpretation
concludes that where an entity has recognized an impairment loss in
an interim period, that impairment may not be reversed in subsequent interim financial statements or in annual financial statements.
The Group will apply IFRIC 10 as of January 1, 2007, but this is not
expected to have any impact on the Group’s financial statements.
IFRIC 11 IFRS 2 Group and Treasury Share Transactions

The interpretation becomes effective on March 1, 2007 and applies
to fiscal years beginning after that date. The interpretation clarifies
treatment regarding classification of share-based payments in which
the company repurchases shares to settle its undertaking and
reporting of options programs in subsidiaries that apply IFRS. The
Group will apply IFRIC 11 as of January 1, 2008, but this is not
expected to have any impact on the Group’s financial statements.
IFRIC 12 Service Concession Arrangements

The interpretation becomes effective on January 1, 2008 and
applies to fiscal years beginning after that date. IFRIC 12 addresses
arrangements in which a private company shall establish an infrastructure to provide public service for a specified period. The company is paid for this service during the term of the contract. The
Group will apply IFRIC 12 as of January 1, 2008, but this is not
expected to have any impact on the Group’s financial statements.
Consolidated financial statements
The consolidated financial statements comprise the Parent Company, subsidiaries, joint ventures and associated companies. Subsidiaries are defined as companies in which Volvo holds more than 50%
of the voting rights or in which Volvo otherwise has a controlling
interest. Joint ventures are companies over which Volvo has joint
control together with one or more external parties. Associated companies are companies in which Volvo has a significant influence,
which is normally when Volvo’s holding equals to at least 20% but
less than 50% of the voting rights.
The consolidated financial statement have been prepared in
accordance with the principles set forth in IAS 27, Consolidated and
Separate Financial Statements. Accordingly, intra-Group transactions
and gains on transactions with associated companies are eliminated.
All business combinations are accounted for in accordance with
the purchase method. Volvo applies IFRS 3, Business Combinations
for acquisitions after January 1, 2004, in accordance with the IFRS 1

92

Financial information 2006

Year-end rate

Currency

transition rules. Volvo decided not to restate prior acquisitions. Volvo
values acquired identifiable assets, tangible and intangible, and
liabilities at fair value. Surplus amounts compared with the purchase
consideration are reported as goodwill. Any lesser amount, so-called
negative goodwill, is reported in the income statement.
Companies that have been divested are included in the consolidated financial statements up to and including the date of divestment. Companies acquired during the year are consolidated as of
the date of acquisition.
Joint ventures are reported by use of the proportionate method of
consolidation.
Holdings in associated companies are reported in accordance
with the equity method. The Group’s share of reported income in
such companies is included in the consolidated income statement in
Income from investments in associated companies, reduced in appropriate cases by depreciation of surplus values and the effect of applying different accounting principles. Income from associated companies are included in operating income due to that the investments
are of operating nature.
For practical reasons, most of the associated companies are
included in the consolidated accounts with a certain time lag, normally one quarter. Dividends from associated companies are not
included in consolidated income. In the consolidated balance sheet,
the book value of shareholdings in associated companies is affected
by Volvo’s share of the company’s net income, reduced by depreciation of surplus values and by the amount of dividends received.
Translation to Swedish kronor when
consolidating companies using foreign currencies
AB Volvo’s functional currency is the Swedish krona. All reporting in
group companies for group purposes is made in the currency where
the company has the majority of their revenues and expenses; normally the currency of the country where the company is located. AB
Volvo’s and The Volvo Group’s reporting currency is Swedish kronor.
In preparing the consolidated financial statements, all items in the
income statements of foreign subsidiaries and joint ventures (except
subsidiaries in highly inflationary economies) are translated to Swedish kronor at the average exchange rates during the year (average
rate). All balance sheet items are translated at exchange rates at the
respective year-ends (year-end rate). The differences in consolidated
shareholders’ equity arising as a result of variations between yearend exchange rates are charged or credited directly to shareholders’
equity as a separate component.
The accumulated translation difference related to a certain subsidiary, joint venture or associated company is reversed to income as
a part of the gain/loss arising from the divestment or liquidation of
such a company.
IAS 29, Financial Reporting in Hyperinflationary Economies, is
applied to financial statements of subsidiaries operating in highly
inflationary economies. Volvo applies reporting based on historical

value. Translation differences are charged against earnings for the
year. Currently, Volvo has no subsidiaries with a functional currency
that could be considered a hyperinflationary currency.
Receivables and liabilities in foreign currency
In the individual Group companies as well as in the consolidated
accounts, receivables and liabilities in foreign currency are valued at
period-end exchange rates. Translation differences on operating
assets and liabilities are recognized in operating income, while translation differences arising in financial assets and liabilities are
charged to other financial income and expenses.
Currency swap contracts are reported at fair value, unrealized
gains on exchange rates are reported as short term receivables and
unrealized losses on exchange rates are reported as short term
liabilities.
Exchange rate differences on loans and other financial instruments in foreign currency, which are used to hedge net assets in foreign subsidiaries and associated companies, are offset against
translation differences in the shareholders’ equity of the respective
companies.
Exchange rate gains and losses on payments during the year and
on the valuation of assets and liabilities in foreign currencies at yearend are credited to, or charged against, income in the year they
arise. The more important exchange rates applied are shown above.
Net sales and revenue recognition
The Group’s reported net sales pertain mainly to revenues from
sales of goods and services. Net sales are reduced by the value of
discounts granted and by returns.
Income from the sale of goods is recognized when significant
risks and rewards of ownership have been transferred to external
parties, normally when the goods are delivered to the customers. If,
however, the sale of goods is combined with a buy-back agreement
or a residual value guarantee, the sale is accounted for as an operating lease transaction if significant risks of the goods are retained in
Volvo. Income from the sale of workshop services is recognized
when the service is provided. Rental revenues and interest income in
conjunction with financial leasing or installment contracts are recognized during the underlying contract period. Revenue for maintenance contracts are recognized according to how costs associated
with the contracts are distributed during the contract period.
Interest income is recognized on a continuous basis and dividend
income when it is received.
Leasing – Volvo as the lessor
Leasing contracts are defined in two categories, operational and
financial, depending on the contract’s financial implications. Operational leasing contracts are reported as non-current assets in Assets
in operational leases. Income from operational leasing is reported
equally distributed over the leasing period. Straight-line depreciation
is applied to these assets in accordance with the terms of the undertaking and the deprecation amount is adjusted to correspond to the
estimated realizable value when the undertaking expires. Assessed
impairments are charged in the income statement. The product’s
assessed realizable value at expiration of the undertaking is
reviewed continually on an individual basis.
Financial leasing agreements are reported as Non-current
respective Short-term receivables in the customer financing operations. Income from financial leasing contracts is distributed between
interest income and amortization of the receivable in the customer
financing operations.
In accordance with IAS 14, Segment reporting, operational leasing
contracts should be reclassified to financial in the segment reporting
of Volvo Financial Services if the residual value in these contracts is

guaranteed to Volvo Financial Services by another Volvo business
area. In the Volvo Group’s consolidated balance sheet, these leasing
agreements are still reported as operating leases. Reclassification
from operational to financial leasing contract also affects the income
statement with regards to sales and depreciation. Volvo Financial
Service’s sales are reduced as a result of the reclassification as well
as depreciation, which affect cash flow from operating activities.
However, the Volvo consolidated balance sheet and income statement still recognizes leasing contracts as operational and, accordingly, reports higher sales and depreciation.
Investments in other companies
Volvo accounts for all investments in companies, except if these
investments are classified as associated companies in accordance
with IAS 39, Financial Instruments: Recognition and Measurement.
Companies listed on a financial exchange should be reported in the
balance sheet to market value. Under IAS 39, unrealized gains and
losses attributable to the change in market value of investments are
reported in a separate component of shareholders’ equity except
when the decline in value is significant or other than temporary. If the
value decline is considered other than temporary, the value should
be written down through the income statement. IAS 39 is applied by
Volvo as of January 1, 2005 and the difference in valuation compared with Swedish GAAP and the 2004 accounting principles is
that all such investments have been carried at their cost of acquisition unless there has been a permanent decrease in value. The difference between the valuation at December 31, 2004 and January
1, 2005 is reported in shareholders’ equity. Unlisted shares, for
which a reliable fair value can not be determined, should be reported
at a historical cost reduced in appropriate cases by write-downs.
Reporting of financial assets and liabilities
Volvo reports marketable securities in accordance with IAS 39
based on classification of these assets into a category valued at fair
value through profit and loss.
As of January 1, 2005, Volvo applies IAS 39, regarding the time
that financial assets should be derecognized from the balance sheet.
This occurs when substantially all risks and rewards have been
transferred to an external party. Corresponding principles are
applied regarding financial assets in Volvo’s segment reporting.
Under Swedish GAAP, for the 2004 comparison year, financial assets
should be derecognized at settlement or if the ownership of the
financial assets had been transferred to an external party.
Financial liabilities are reported at historical value reduced by
amortization. Transaction cost in connection with raising financial
liabilities are amortized over the financial loan’s duration as a financial expense.
Receivables
Accounts receivables are initially recognized at fair value, normally
equal with the nominal amount. In cases in which the payment terms
exceed one year, the receivable is carried at its discounted present
value. Provisions for doubtful receivables are made on a current
basis after an assessment of whether the customer’s ability to pay
has changed.
Hedge accounting
In accordance with IAS 39, which is applied by Volvo as of January
1, 2005, certain financial instruments shall be reported at fair value
in the balance sheet. In order to apply hedge accounting, the following criteria must be met: the position being hedged is identified and
exposed to market value movements, for instance related to
exchange-rate or interest-rate movements, the purpose of the loan/
instrument is to serve as a hedge and the hedging effectively proFinancial information 2006 93

The Volvo Group

Notes to consolidated financial statements

tects the underlying position against changes in the fair value.
Financial instruments used for the purpose of hedging future currency flows are accounted for as hedges if the currency flows are
considered highly probable to occur.
– For financial instruments used to hedge forecasted internal
commercial cash flows and forecasted electricity consumption, the
fair value is debited or credited to a separate component of equity to
the extent the requirements for cash-flow hedge accounting are fulfilled. To the extent that the requirements are not met, the unrealized
gain or loss will be charged to income statement. Gains and losses
on hedges are reported at the same time that the gains and losses
arise on the items hedged and are recognized in consolidated shareholders’ equity.
– For financial instruments used to hedge interest and currency
risks on loans, Volvo previously applied through and including 2004
hedge accounting in accordance with Swedish GAAP. The difference between the carrying value according to Swedish GAAP and
the fair value according to IFRS as of January 1, 2005, was charged
against the income statement over the remaining time of the hedged
instrument. Under the more complex rules in IAS 39, Volvo has chosen not to apply hedge accounting. The difference between carrying
values reported under Swedish GAAP and fair values to be reported
under IFRS pertains to unrealized interest-rate gains and losses
attributable to the period between the reporting date and maturity
dates of the derivatives. The unrealized gains and losses will be
charged to the financial net in the income statement.
– Volvo applies hedge accounting for certain net investments in
foreign operations. The current result for such hedges is reported in
a separate component in shareholders’ equity. In the event of a
divestment, the accumulated result from the hedge is recognized in
the income statement.
Research and development expenses
Volvo applies IAS 38, Intangible Assets, for reporting of research
and development expenses. In accordance with this accounting recommendation, expenditures for development of new products, production systems and software shall be reported as intangible assets
if such expenditures with a high degree of certainty will result in
future financial benefits for the company. The acquisition value for
such intangible assets shall be amortized over the estimated useful
life of the assets. The rules means that high demands are established in order for these development expenditures to be reported as
assets. For example, it must be possible to prove the technical functionality of a new product or software prior to this development being
reported as an asset. In normal cases, this means that expenditures
are capitalized only during the industrialization phase of a product
development project. Other research and development expenses are
charged to income as incurred.
Depreciation, amortization and impairments of tangible
and intangible non-current assets
Volvo applies historical costs for valuation of intangible and tangible
assets. Loan expenses during the acquisition period for a non-current asset are expenses. Depreciation is based on the historical cost
of the assets, adjusted in appropriate cases by write-downs, and
estimated useful lives.
Depreciation periods
Capitalized type-specific tools
Operational leases
Machinery
Buildings and Investment property
Land improvements
Product and software development
94

Financial information 2006

2 to 8 years
3 to 5 years
5 to 20 years
25 to 50 years
20 years
3 to 8 years

In connection with its participation in aircraft engine projects with
other companies, Volvo Aero in certain cases pays an entrance fee.
These entrance fees are capitalized as an intangible asset and
amortized over 5 to 10 years.
Information regarding estimated value of investment property is
based on discounted cash flow projections. The estimation is performed by the Group’s Real Estate business unit. The required return
is based on current property market conditions for comparable properties in comparable locations.
Goodwill is reported as intangible non-current assets with indefinite useful life. Annually, testing is carried out to determine any
impairment through calculation of the asset’s recovery value. If the
calculated recovery value is less than the carrying value, a write
down is made to the asset’s recovery value.
Similarly, impairment testing is carried out at the closing date if
there is any indication that a non-current asset has declined in value.
Leasing – Volvo as the lessee
Volvo evaluates leasing contracts in accordance with IAS 17, Leases.
In those cases in which the financial risk and benefits that are
related to ownership, so called finance lease, are in significant
respects held by Volvo, Volvo reports the asset and related obligation in the balance sheet at the lower of the leased asset’s fair value
or the present value of minimum lease payments. The future leasing
fees are reported as loans. The lease asset is depreciated in accordance with Volvo’s policy for the respective non-current asset. The
lease payments when made are allocated between amortization and
interest expenses. If the leasing contract is considered to be a so
called operational lease the income statement is charged over the
lease contract’s lifetime.
Non-current assets held for sale and discontinued operations
Volvo applies IFRS 5, Non-current Assets Held for Sale and Discontinued Operations as of 2005. Processes are continuously ongoing
regarding the sale of assets or groups of assets at minor values. In
cases in which the criteria for being classified as a non-current asset
held for sale are fulfilled and the asset or group of assets is other
than of minor value, the asset or group of assets and the related
liabilities are reported on a separate line in the balance sheet. The
asset or group of assets are tested for impairment and valued at fair
value after deduction for selling expenses if impaired.
Inventories
Inventories are stated at the lower of cost, in accordance with the
first-in, first-out method (FIFO), or net realizable value. The historical
value is based on the standard cost method, including costs for all
direct manufacturing expenses and the apportionable share of the
capacity and other related manufacturing costs. The standard costs
is tested regularly and adjustment is made based on current conditions. Costs for research and development, selling, administration
and financial expenses are not included. Net realizable value is calculated as the selling price less costs attributable to the sale.
Share-based payments
Volvo applies IFRS 2, Share-based Payments for the new share-based
incentive program adopted at the Annual General Meetings in 2004,
2005 and 2006. IFRS 2 distinguishes “cash-settled” and “equity-settled”, in Volvo case, shares, components of share-based payments.
The Volvo program include both a cash-settled and an equity-settled
part. The value of the equity-settled payments is determined at the
grant-date, recognized as an expense during the vesting period and
credited to equity. The fair value is calculated according to share price
reduced by dividend connected to the share before the allotment. The

additional social costs are reported as a liability, revalued at each balance sheet date in accordance with URA 46, issued by the Swedish
Financial Accounting Standards Council’s Emergency Issue Task
Force. The cash settled payment is revalued at each balance sheet
day and is reported as an expense during the vesting period and as a
short term liability. An assessment whether the terms of payment will
be fulfilled is made continuously. If the assessment changes, the
expense will be adjusted. The equity-settled part was earlier accounted
for at fair value and provided for as an accrued expense over the vesting period with a ”true-up” each reporting date.
Pensions and similar obligations (Postemployment benefits)
Volvo applies IAS 19, Employee Benefits, for pensions and similar
obligations. In accordance with IAS 19, actuarial calculations should
be made for all defined-benefit plans in order to determine the
present value of obligations for benefits vested by its current and
former employees. The actuarial calculations are prepared annually
and are based upon actuarial assumptions that are determined close
to the balance sheet date each year. Changes in the present value of
obligations due to revised actuarial assumptions are treated as actuarial gains or losses which are amortized over the employees’ average remaining service period to the extent these exceed the corridor
value for each plan. Deviations between expected return on plan
assets and actual return are treated as actuarial gains or losses.
Provisions for post-employment benefits in Volvo’s balance sheet
correspond to the present value of obligations at year-end, less fair
value of plan assets, unrecognized actuarial gains or losses and
unrecognized unvested past service costs.
In accordance with the IFRS transition rules, the carrying amount
of the liability is determined at January 1, 2004 in accordance with
IAS 19 and the actuarial gains and losses set at zero. As a supplement to IAS 19, Volvo applies URA 43 in accordance with the
recommendation from the Swedish Financial Accounting Standards
Council in calculating the Swedish pension liabilities.
For defined contribution plans premiums are expensed as incurred.

nection with specific quality problems are charged to operating
expenses when the campaign is decided and announced.
Restructuring costs
Restructuring costs are reported as a separate line item in the
income statement if they relate to a considerable change of the
Group structure. Other restructuring costs are included in Other
operating income and expenses. A provision for decided restructuring measures is reported when a detailed plan for the implementation of the measures is complete and when this plan is communicated to those who are affected.
Deferred taxes, allocations and untaxed reserves
Tax legislation in Sweden and other countries sometimes contains
rules other than those identified with generally accepted accounting
principles, and which pertain to the timing of taxation and measurement of certain commercial transactions. Deferred taxes are provided for on differences that arise between the taxable value and
reported value of assets and liabilities (temporary differences) as
well as on tax-loss carryforwards. However, with regards to the valuation of deferred tax assets, that is, the value of future tax reductions, these items are recognized provided that it is probable that the
amounts can be utilized against future taxable income.
Deferred taxes on temporary differences on participations in subsidiaries and associated companies are only reported when it is
probable that the difference will be recovered in the near future.
Tax laws in Sweden and certain other countries allow companies
to defer payment of taxes through allocations to untaxed reserves.
These items are treated as temporary differences in the consolidated
balance sheet, that is, a split is made between deferred tax liability
and equity capital (restricted reserves). In the consolidated income
statement an allocation to, or withdrawal from, untaxed reserves is
divided between deferred taxes and net income for the year.

Provisions for residual value risks
Residual value risks are attributable to operational leasing contracts
and sales transactions combined with buy-back agreements or
residual value guarantees. Residual value risks are the risks that
Volvo in the future would have to dispose used products at a loss if
the price development of these products is worse than what was
expected when the contracts were entered. Provisions for residual
value risks are made on a continuing basis based upon estimations
of the used products’ future net realizable values. The estimations of
future net realizable values are made with consideration of current
prices, expected future price development, expected inventory turnover period and expected variable and fixed selling expenses. If the
residual value risks are pertaining to products that are reported as
tangible assets in Volvo’s balance sheet, these risks are reflected by
depreciation or write-down of the carrying value of these assets. If
the residual value risks are pertaining to products, which are not
reported as assets in Volvo’s balance sheet, these risks are reflected
under the line item short-term provisions.

Cash-flow statement
The cash-flow statement is prepared in accordance with IAS 7, Cash
Flow Statement, indirect method. The cash-flow statements of foreign Group companies are translated at the average rate. Changes
in Group structure, acquisitions and divestments, are reported net,
excluding cash and cash equivalents, in the item Acquisition and
divestment of subsidiaries and other business units and are included
in Cash Flow from Investing Activities. The reported operating cash
flow for 2005 was affected by the adoption of IAS 39. The adjusted
opening value at January 1, 2005 was used in calculating cash flow.
Cash and cash equivalents include cash, bank balances and parts
of Marketable Securities, which date of maturity are within three
months at the time for investment. Marketable Securities comprise
interest-bearing securities, the majority of which with terms exceeding three years. However, these securities have high liquidity and can
easily be converted to cash. In accordance with IAS 7, certain investment in marketable securities are excluded from the definition of
cash and cash equivalents in the cash-flow statement if the date of
maturity of such instruments is later than three months after the
investment was made.

Warranty expenses
Estimated costs for product warranties are charged to operating
expenses when the products are sold. Estimated costs include both
expected contractual warranty obligations as well as expected goodwill warranty obligations. Estimated costs are determined based
upon historical statistics with consideration of known changes in
product quality, repair costs or similar. Costs for campaigns in con-

Earnings per share
Earnings per share is calculated as the income for the period attributed to the shareholders of the parent company, divided with the average number of outstanding shares per reporting period. To calculate
the diluted earnings per share, the average number of shares is
adjusted with the value of the share based incentive program and
employee stock option program recalculated to number of shares.

Financial information 2006 95

The Volvo Group

Notes to consolidated financial statements

Note

2

Key sources of estimation uncertainty

Key sources of estimation uncertainty
Volvo’s significant accounting principles are set out in note 1,
Accounting Principles and conform to IFRS as adopted by the EU.
The preparation of Volvo’s Consolidated Financial Statements
requires the use of estimates, judgements and assumptions that
affect the reported amounts of assets, liabilities and provisions at
the date of the financial statements and the reported amounts of
sales and expenses during the periods presented. In preparing these
financial statements, Volvo’s management has made its best estimates and judgements of certain amounts included in the financial
statements, giving due consideration to materiality. The application
of these accounting principles involves the exercise of judgement
and use of assumptions as future uncertainties and, as a result,
actual results could differ from these estimates. In accordance with
IAS 1, preparers are required to provide additional disclosure of
accounting principles in which estimates, judgments and assumptions are particularly sensitive and which, if actual results are different, may have a material impact on the financial statements. The
accounting principles applied by Volvo that are deemed to meet
these criteria are discussed below:
Impairment of goodwill, other intangible assets
and other non-current assets
Property, plant and equipment, intangible assets, other than goodwill, and certain other non-current assets are amortized and depreciated over their useful lives. Useful lives are based on management’s
estimates of the period that the assets will generate revenue. If, at
the date of the financial statements, there is any indication that a
tangible or intangible non-current asset has been impaired, the
recoverable amount of the asset should be estimated. The recoverable amount is the higher of the asset’s net selling price and its
value in use, estimated with reference to management’s projections
of future cash flows. If the recoverable amount of the asset is less
than the carrying amount, an impairment loss is recognized and the
carrying amount of the asset is reduced to the recoverable amount.
Determination of the recoverable amount is based upon management’s projections of future cash flows, which are generally made by
use of internal business plans or forecasts. While management
believes that estimates of future cash flows are reasonable, different
assumptions regarding such cash flows could materially affect our
valuations. Intangible and tangible non-current assets amounted to
73,997 whereof 8,849 represents goodwill. For Goodwill and certain
other intangible assets with indefinite life-time an annual impairment
review is performed at the year-end closing. Such an impairment
review will require management to determine the fair value of Volvo’s
cash generating units, reporting units for US GAAP purposes, on the
basis of projected cash flows and internal business plans and forecasts. Volvo has since 2002 performed a simliar impairment review
in accordance with US GAAP. No impairment charges were required
for the period 2002–2006.
Residual value risks
In the course of its operations, Volvo is exposed to residual value
risks through operating lease agreements and sales combined with
repurchase agreements. The products, primarily trucks, for which
Volvo has a residual value commitment, are generally recognized in
the balance sheet as assets under operating leases. Depreciation
expenses for these products are charged on a straight-line basis

96

Financial information 2006

over the term of the commitment in amounts required to reduce the
value of the product to its estimated net realizable value at the end
of the commitment. Estimated impairment losses are immediately
charged to income. The estimated net realizable value of the products at the end of the residual value commitments is monitored individually on a continuing basis. In monitoring estimated net realizable
value of each product under a residual value commitment, management makes consideration of current price-level of the used product
model, value of options, mileage, condition, future price deterioration
due to expected change of market conditions, alternative distribution
channels, inventory lead-time, repair and reconditioning costs,
handling costs and overhead costs in the used product divisions.
Provisions for residual value risk amount to 781.
Revenue recognition
Revenue from the sale of goods is recognized when significant risks
and rewards of ownership have been transferred to external parties,
normally when the goods are delivered to the customers. If, however,
the sale of goods is combined with a buy-back agreement or a
residual value guarantee, the sale is accounted for as an operating
lease transaction under the condition that significant risks of the
goods are retained by Volvo. In certain cases Volvo enters into a buyback agreement or residual value guarantee after Volvo sold the
product to an independent party or in combination with an undertaking from the customer that in the event of a buy-back to purchase a
new Volvo product. In such cases, there may be a question of judgement regarding whether or not significant risks and rewards of
ownership have been transferred to the customer. If it is determined
that such an assessment was incorrect, Volvo’s reported revenue
and income for the period will decline and instead be distributed
over several reporting periods.
Deferred taxes
Under IFRS, deferred taxes are recognized for temporary differences, which arise between the taxable value and reported value of
assets and liabilities as well as for unutilized tax-loss carryforwards.
Volvo records valuation allowances against deferred tax assets
where management does not expect such assets to be realized
based upon current forecasts. In the event that actual results differ
from these estimates or management adjusts these estimates in
future periods, changes in the valuation allowance may need to be
done that could materially impact our financial position and the
income for the period. At December 31, 2006, a valuation allowance
of 213 was established for the value of deferred tax assets. Net of
this valuation allowance, deferred tax assets net of 10,069 were
recognized in the Group’s balance sheet.
Inventory obsolescence
Inventories are reported at the lower of historical cost, in accordance
with the first-in, first-out method (FIFO), and net realizable value. The
estimated net realizable value includes management consideration
of out-dated articles, over-stocking, physical damages, inventorylead-time, handling and other selling costs. If the estimated net realizable value is lower than historical cost, a valuation allowance is
established for inventory obsolescence. The total inventory value, net
from inventory obsolescence allowance, is per December 31, 2006,
34,211.

Credit loss reserves
The establishment of credit loss reserves on customer financing
receivables is dependent on estimates including assumptions
regarding past dues, repossession rates and the recovery rate on
the underlying collateral. At December 31, 2006, the total credit loss
reserves in Volvo Financial Services amounted to 2.01% of the total
credit portfolio, SEK 77 billions.
Pensions and other post-employment benefits
Provisions and costs for post-employment benefits, i.e. mainly pensions and health-care benefits, are dependent on assumptions used
by actuaries in calculating such amounts. The appropriate assumptions and actuarial calculations are made separately for each population in the respective countries of Volvo’s operations. The assumptions include discount rates, health care cost trends rates, inflation,
salary growth, long-term return on plan assets, retirement rates,
mortality rates and other factors. Discount rate assumptions are
based on long-term high quality corporate bond and government
bond yields available at year-end. Health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends. Inflation assumptions are based on an evaluation of external market indicators. The
salary growth assumptions reflect the long-term actual experience,
the near-term outlook and assumed inflation. Retirement and mortality rates are based primarily on officially available mortality statistics.
We review our actuarial assumptions on an annual basis and make
modifications to them when it is deemed appropriate to do so. Actual
results that differ from management’s assumptions are accumulated
and amortized over future periods and, therefore, generally affect the
recognized expense and recorded provisions in such future periods.
See Note 24 for more information regarding costs and assumptions
for post-employment benefits. At December 31, 2006 net provisions
for post-employment benefits amounted to 6,651.
Product warranty costs
Estimated costs for product warranties are charged to cost of sales
when the products are sold. Estimated warranty costs include contractual warranty and goodwill warranty (warranty cover in excess of
contractual warranty or campaigns which is accepted as a matter of
policy or normal practice in order to maintain a good business rela-

Note

3

tion with the customer). Warranty provisions are estimated with consideration of historical claims statistics, the warranty period, the
average time-lag between faults occurring and claims to the company and anticipated changes in quality indexes. Differences
between actual warranty claims and the estimated claims generally
affect the recognized expense and provisions in future periods.
Refunds from suppliers, that decrease Volvo’s warranty costs, are
recognized to the extent these are considered to be virtually certain.
At December 31, 2006 warranty cost provisions amounted to 8.411.
Legal proceedings
Volvo only recognizes liabilities in the accounts where Volvo has a
present obligation from a past event, a transfer of economic benefits
is probable and Volvo can make a reliable estimate of the size of the
amount. In instances such as these, a provision is calculated and
recognized in the balance sheet. In instances where these criteria
are not met, a contingent liability may be disclosed in the notes to
the accounts. A contingent liability will be disclosed when a possible
obligation has arisen but its existence will only be confirmed by
future events not wholly within Volvo’s control or in circumstances
where an obligating event has occurred but it is not possible to
quantify the size or likelihood of that obligation crystallizing. Realization of any contingent liabilities not currently recognized or disclosed
in the financial statements could have a material effect on Volvo’s
financial condition. Volvo regularly reviews significant outstanding
legal cases following developments in the legal proceedings in order
to assess the need for provisions in our financial statements. Among
the factors that Volvo considers in making decisions on provisions
are the nature of the litigation, claim or assessment, the legal processes and potential level of damages in the jurisdiction in which the
litigation, claim or assessment has been brought, the progress of the
case (including progress after the date of the financial statements
but before those statements are issued), the opinions or views of
legal counsel and other advisers, experience in similar cases, and
any decision of Volvo’s management as to how Volvo intends to
respond to the litigation, claim or assessment. To the extent the
determinations at any time do not reflect subsequent developments
or the eventual outcome of any claim, our future financial statements
may be materially affected, with an adverse impact upon our results
of operation, financial position and liquidity.

Transition to IFRS

This note is included in the 2006 year’s annual report for the readers convenience and describes the transition made in 2005 to IFRS.
Reporting in accordance with IFRS as from 2005
The Volvo Group’s financial reporting is up to 2004 prepared in
accordance with generally accepted accounting principles in Sweden
(“Swedish GAAP”). Effective from 2005, all listed companies within
the European Union (“the EU”) are required to prepare their consolidated financial reporting in accordance with International Financial
Reporting Standards (“IFRS”), as adopted by the EU. The purpose of
the presentations on the following pages is to describe and explain
the expected impact on Volvo’s financial reporting as a consequence
of transition to IFRS. Volvo Group’s previous accounting principles
are described in Note 1 of the 2004 Annual Report. The presentation below focuses on the areas in which the transition to IFRS
resulted in a change in accounting principles for Volvo.
Restatements and transition effects
In accordance with the IFRS transition rules (IFRS 1), Volvo applies

IFRS as of January 1, 2005, with retroactive application from the
IFRS transition date at January 1, 2004. The general rule is that
restatement of financial reporting for periods after the transition
date should be made as if IFRS has been applied historically. There
are certain exceptions from the general rule of which the most significant for Volvo are:
– IAS 39 Financial instruments: Recognition and measurement
which can be applied from January 1, 2005.
– Non-amortization of intangible assets with indefinite useful lives
(e.g. goodwill) in accordance with IFRS should be applied retroactively only from the transition date January 1, 2004.
– IFRS 3 Business Combinations which can be applied from January
1, 2004, without restatements of previous acquisitions.
– IFRS 2 Share-based payments are applied for share-based payments granted after November 7, 2002.
The enclosed income statements and other specifications prepared
in accordance with IFRS therefore include restatements and transition effects as follows:
Financial information 2006 97

The Volvo Group

Notes to consolidated financial statements

Capitalization and amortization of development costs
Effective on January 1, 2001, Volvo adopted the accounting standard RR 15 “Intangible Assets” under Swedish GAAP. According to
this accounting standard, expenditures relating to development of
new and existing products and software should be capitalized and
amortized over their estimated useful life. According to the transition
rules for RR 15, no retroactive application was permitted. According
to the transition rules for IFRS, the accounting standard IAS 38,
Intangible Assets, which is mainly similar to RR 15 regarding the
accounting for development costs, should be applied retroactively for
development costs incurred prior to 2001. The restatements and
transition effects attributable to this accounting change therefore
pertains to retroactive capitalization and amortization of development costs incurred prior to 2001.
Minority interests
In accordance with IFRS, minority interests are presented as a separate component of Shareholders’ equity and is included in the
income for the period in the income statement.
Non-amortization of intangible assets
with indefinite useful lives
According to Swedish GAAP, all intangible assets have been amortized over their estimated useful lives. In accordance with IFRS,
intangible assets considered to have indefinite useful lives should
not be amortized. Such assets should rather be subject to an annual
impairment test. Volvo has determined that intangible assets with
indefinite useful lives include only goodwill. Volvo has chosen not to
apply IFRS 3, retroactively in accodance with the IFRS transition
rules. The restatements and transition effects attributable to this
accounting change therefore pertain to reversal of goodwill amortization charged to the income statement under Swedish GAAP for
2004 and a corresponding increase of the carrying value of goodwill
at December 31, 2004, adjusted for currency translation differences.
Employee benefits
Effective on January 1, 2003, Volvo adopted RR 29 “Employee benefits” under Swedish GAAP. RR 29 is similar to the IFRS accounting
standard IAS 19. The only difference between Swedish GAAP and
IFRS relates to the date of transition. In accordance with the transition rules of RR 29, actuarial gains and losses arising prior to January 1, 2003, were set to zero and charged to equity as of the transition date. In accordance with the IFRS transition rules, actuarial
gains and losses arising prior to January 1, 2004, could be set to
zero and charged to equity as of the transition date. The transition
effects attributable to the accounting change therefore pertain to
recognizing actuarial gains and losses that have arisen between
January 1, 2003 and January 1, 2004. Volvo has applied URA 43
according to the statement from the Swedish Financial Accounting
Standards Council in calculating the Swedish pension liabilities, in
addition to IAS 19.
Investments in other companies
Volvo accounts for all investments in companies, except if these
investments are classified as associated companies in accordance
with IAS 39, Financial Instruments: Recognition and Measurement.
Companies listed on a financial exchange should be reported in the
balance sheet to market value. Under Swedish GAAP such investments have been carried at their cost of acquisition unless there has
been a permanent decrease in value. Under IAS 39, unrealized gains
and losses attributable to the fair value of investments are reported
in a separate component of shareholders’ equity except when a
decline in value is other than temporary. The transition effect on

98

Financial information 2006

January 1, 2005, attributable to this accounting change is mainly
related to Volvo’s investment in Deutz AG.
Fair value of derivative instruments
In accordance with IAS 39, which is applied by Volvo as of January 1,
2005, all derivative financial instruments should be reported in the
balance sheet at fair value. The difference between IAS 39 and
accounting principles applied for derivative financial instruments
under Swedish GAAP is dependent on the use of the derivative
instruments:
– Derivative financial instruments used for hedging of forecasted
commercial cash-flows and forecasted electricity consumption:
Under Swedish GAAP Volvo has applied hedge accounting for the
main part of these derivatives and these instruments have consequently not been reported in the balance sheet (“Off-balance sheet
instruments”). Gains and losses on these contracts have been
charged to the income statement at the time of maturity of the specific contracts. Under IFRS, the fair value of outstanding derivative
instruments is debited or credited to a separate component of equity
to the extent the requirements for cash-flow hedge accounting are
fulfilled. To the extent that the requirements are not met, the unrealized gain or loss is charged to the income statement.
– Derivative financial instruments used for hedging of interest-rate
risks and currency-rate risks on loans:
Under Swedish GAAP Volvo has applied hedge accounting for these
derivatives and the carrying value of such derivatives has therefore
corresponded to currency-rate and interest-rate gains and losses
accruable up to the reporting date. Under the more complex rules in
IAS 39 Volvo has chosen not to apply hedge accounting for interest
rate contracts. The difference between carrying values reported
under Swedish GAAP and fair values to be reported under IFRS pertains to unrealized interest rate gains and losses attributable to the
period between the reporting date and maturity dates of the derivatives. The difference should be charged to income over the hedged
instrument’s remaining time to maturity. The unrealized gains and
losses will be charged to the financial net in the income statement.
Derecognition of financial assets
In accordance with IAS 39, which is applied by Volvo as of January 1,
2005, financial assets should be derecognized from the balance
sheet when substantially all risks and rewards have been transferred
to an external party. Under Swedish GAAP, financial assets should
be derecognized at settlement or if the ownership of the financial
assets has been transferred to an external party. The transition
effect on January 1, 2005, attributable to this accounting change is
mainly related to certain dealer financing arrangements for which
Volvo has retained components of credit risk. Such credit risk commitments have under Swedish GAAP been reported as contingent
liabilities. This has mainly affected the segment reporting and to a
less extent Volvo’s consolidated balance sheet.
Consolidation of temporary investments
Under Swedish GAAP, temporary investments in subsidiaries should
not be consolidated. Under IFRS, all subsidiaries should be consolidated. Restatements and transition effects relating to this accounting change pertains mainly to Volvo’s investment in the LB Smith
distribution business. This operation was acquired in May 2003 and
at December 31, 2004, the major part of this operation had been
divested. The 2004 income statement is restated with the parts of
LB Smith that have been divested during the year. The remaining
part, still owned by Volvo, has been consolidated in full according to
Swedish GAAP in the fourth quarter of 2004.

IFRS 2 Share-based Payments
Volvo has decided that the “new share-based incentive program”
adopted at the 2004 Annual General Meeting is covered by IFRS 2
Share-based payments. The impact, however, was limited. The IFRS
2 distinguishes between “cash-settled” and “equity-settled” components of share-based payments, in Volvo cases, shares. The Volvo
program include both a cash-settled and an equity-settled part. The
equity-settled part was earlier accounted for at fair value and provided for as an accrued expense over the vesting period with a “true
up” each reporting date. According to IFRS 2 the fair value is determined at the grant-date, recognized as an expense during the vesting period and credited to equity. Additional social costs are
reported as a liability and is revalued at each balance sheet day in
accordance with URA 46.
IFRS 5 Non-Current Asset Held for Sale
and Discontinued Operations
IFRS 5 is applied prospectively from January 1, 2005, according to
IFRS 1. Volvo had not identified any non-current assets that could be
classified held for sales and which would have had material impact
on the balance sheet as of December 31, 2004, and no effect has
been identified in the 2004 income statement. Discontinued operations pertain to significant operations, such as operating segments,
comprising one or more cash-generating units. The rules for discontinued operations have not been applicable for Volvo during 2004
and 2005.
Other transition rules according to IFRS 1
and IFRS standards
In applying IFRS, Volvo had the possibility to chose to measure property, plant and equipment at fair value. Volvo has chosen not to use
this possibility but continue the present valuation of property, plant
and equipment at historical cost less accumulated depreciation. The
same treatment is also used for investment properties. IFRS 1 provides an option how to treat the effects of Changes in Foreign
Exchange Rates, according to IAS 21. A first time adopter of IFRS
could set the cumulative translation difference to zero for foreign
operations. Volvo has chosen this possibility and set the translation
difference to zero at January 1, 2004. Assumptions made under previous GAAP shall not be changed under the transition to IFRS
unless there is objective evidence that those were in error. Volvo has
made no changes in assumptions in the preparation of comparative
Cash-flow statement
SEK billion

information prepared in accordance with IFRS. According to SIC 12,
Special Purpose Entities should be consolidated as from January 1,
2004. Volvo has not identified any such Special Purpose Entities.
Definition of cash and cash equivalents in
presentation of cash-flow statements
Under Swedish GAAP, all investments in marketable debt securities
have been included in the definition of cash and cash equivalents for
the purpose of the cash-flow statement. In accordance with Volvo’s
financial risk policy, all such securities should fulfill requirements
regarding low risk and high liquidity. Under IFRS, investments in marketable securities are excluded from the definition of cash and cash
equivalents for the purpose of the cash-flow statement if these
instruments have maturity dates beyond three months from the date
of investment. In the 2004 closing no marketable securities were
defined as cash equivalents according to IFRS. Classification of cash
and cash equivalents in the cash-flow statement does not affect
Volvo’s net financial position.
In the transition to IFRS the following reclassification is done in
the cash flow statement. Customer finance receivables, net, are
reported within Cash flow from operating activities, instead of as
previously being reported as Cash flow from investing activities.
Cash flow related to customer financing operations arises mainly
within Financial Services (VFS). Changes in customer financing are
currently reported in Volvo’s cash-flow statement with VFS consolidated in accordance with the equity method as changes in working
capital, since Volvo’s operations excluding VFS do not have any significant customer financing operations. Changes in customer financing operations are reported on a separate line in Volvo’s cash-flow
statement including VFS. Volvo’s reported Operating Cash-flow is
not affected by the reclassification.
Classification of leasing contracts in segment reporting
of Financial Services
In accordance with IFRS, operating lease contracts with end-customers are in segment reporting for Financial Services reported as
financial leasing contracts if the residual value in these contracts is
guaranteed to Financial Services by another Volvo business area. In
the Volvo Group’s consolidated balance sheet, these leasing agreements are still reported as assets under operating lease. In comparison with the 2004 closing approximately SEK 12 billion is reclassified to financial leases from operating leases in the Financial
Services segment reporting.
According to previous presentation

Presentation according to IFRS

2004

2005

2004

2005

14.7
10.0
(0.1)
(1.4)

18.2
9.9
0.4
(4.7)

(0.5)
22.7

(2.0)
21.8

14.7
10.0
(0.1)
(1.4)
(7.4)
(0.5)
15.3

18.2
9.9
0.4
(4.7)
(7.8)
(2.0)
14.0

(7.4)
(4.4)
2.4
(7.4)
5.9

(10.3)
(4.5)
2.6
(7.8)
1.8

(7.4)
(4.4)
2.4

(10.3)
(4.5)
2.6

5.9

1.8

Financial information 2006 99

The Volvo Group

Notes to consolidated financial statements

Financial position December 31, 2004
Updated, taking into account, all differences between Swedish
GAAP and IFRS except IAS 39 Financial instruments: Recognition
and measurement and IFRS 5, Non-Current Assets Held for Sale
and Discontinued Operations. The first column is the closing balance
Consolidated balance sheets
December 31, 2004

1 Financial Services reported in accordance with the equity method.
2 The Volvo Group total column is presented in accordance with IFRS and
equals the consolidated balance sheet presented on page 53. The two proceeding columns do not total the Volvo Group total due to (i) reclassification

100

per December 31, 2004 according to Swedish GAAP. The impact of
IFRS is shown as IFRS adjustment and the third column shows the
adjusted closing balance December 31, 2004, according to IFRS.
This balance has been opening balance for the 2005 reporting.

of lease contracts and (ii) eliminations of intra group balances. Certain
lease contracts are accounted for as operating lease contracts in the Volvo
Group total balance sheet where as they are accounted for as finance lease
contracts in Financial Services stand alone.

charged to Equity according to IFRS 1 as of January 1, 2005. The
IFRS balance including IAS 39 effects has been used as opening
balance for cash flow calculation during 2005.

Financial position January 1, 2005
Updated taking into account all differences between Swedish GAAP
and IFRS including IAS 39 and IFRS 5. Impact of adopting IAS 39 is
Consolidated balance sheets

1 Financial Services reported in accordance with the equity method.
2 The Volvo Group total column is presented in accordance with IFRS and
equals the consolidated balance sheet presented on page 53. The two proceeding columns do not total the Volvo Group total due to (i) reclassification

of lease contracts and (ii) eliminations of intra group balances. Certain
lease contracts are accounted for as operating lease contracts in the Volvo
Group total balance sheet where as they are accounted for as finance lease
contracts in Financial Services stand alone.

Research and development expenses
Selling expenses
Administrative expenses
Other operating income and expenses
Income from Financial Services
Income from investments
in associated companies
Income from other investments
Operating income

(7,614)
(18,317)
(5,310)
7
1,365

(7,233)
(18,048)
(5,321)
(658)
1,365

2
828
14,679

2
828
14,200

Interest income and similar credits
Interest expenses and similar charges
Other financial income and expenses
Income after financial items

Significant differences between Swedish GAAP and IFRS
The most significant differences between Swedish GAAP and IFRS for Volvo are further explained below
in the Equity- and net income reconciliation:
Summarized reconciliation of shareholders’ equity
SEK M

Net income under Swedish GAAP
IFRS adjustments:
Capitalization and amortization of intangible assets
Minority interest
Non-amortization of goodwill
Post-employment benefits
Consolidation of temporary investments
Deferred taxes on IFRS adjustments
Total adjustments to IFRS
Income for the period under IFRS

2004

9,355
(382)
40
684
13
142
55
552
9,907

Summarized reconciliation of net financial position
SEK bn

2004

Volvo Group excl VFS
Net financial position at December 31, 2004 under Swedish GAAP

18.7

IFRS adjustments:
Post-employment benefits
Derecognition of financial assets
Total adjustments to IFRS
Net financial position at January 1, 2005 under IFRS

(0.5)
(3.4)
(3.9)
14.8

Financial information 2006 103

The Volvo Group

Notes to consolidated financial statements

Note

4

Acquisition and divestments of shares in subsidiaries

AB Volvo’s holding of shares in subsidiaries as of December 31,
2006 is shown in the table on pages 149–151, AB Volvo’s holding
of shares. Significant acquisitions, formations and divestments
within the Group are listed below.
Shandong Lingong Construction Machinery Co.
Volvo Construction Equipment (Volvo CE) has made an equity investment of 70% in Shandong Lingong Construction Machinery Co.
China is the world’s largest market for wheel loaders. The total market for 2005 was approximately 110,000 units. Lingong is the fourth
largest producer of wheel loaders in China with a comprehensive
dealer network throughout the country. In addition to 16 different
models of wheel loaders, Lingong also has a smaller range of backhoe loaders, road rollers and excavators.
In January 2007, it was announced that Volvo Construction Equipment (Volvo CE) had received all necessary regulatory approvals for
an equity investment of 70% in Lingong and the deal is now closed.
Volvo CE has invested RMB 328 M, corresponding to just over SEK
300 M, in exchange for 70% of the equity in Lingong. In 2005 Lingong’s operating income was RMB 10 M on revenue of RMB 2 B
and had around 1,800 employees. The deal has no material impact
on Volvo’s financial position.
Celero Support AB
In November 2005 Volvo sold Celero Support AB to Coor Service
Management for 680 before deduction for the company’s net debt.
The sale resulted in a gain of about 430. Celero Support AB is a
service company with operations that include various office and
workplace sevices as well as maintenance of industrial plants and
properties. Celero Support had 1,100 employees and net sales of
approximately 1.4 billion when sold.
Properties
In February 2005, Volvo Financial Services, via the Volvo Group’s
real estate company, Danafjord AB, entered an agreement on the
sale of two wholly owned companies, which own properties in Torslanda and Kalmar valued at about 515. The sale yielded a capital
gain of 188.
L.B. Smith (SABA Holding Inc.)
On May 2, 2003 Volvo Construction Equipment purchased the
assets amounting to USD 189 M associated with the Volvo distribution business of L.B. Smith Inc. in the US. No goodwill or real estate
was included in the deal. The major part of the dealerships was
divested during 2004.
Renault V.I. and Mack
During the fourth quarter 2004 AB Volvo and Renault signed a settlement agreement regarding the disagreement the companies have
had since 2001 pertaining to Volvo’s acquisition of Renault V.I./
Mack and the value of certain of the acquired assets and certain
warranty claims. The settlement, EUR 108 M has reduced the goodwill amount pertaining to the acquisition of Renault V.I.

104

Financial information 2006

Prévost Car Inc.
During the third quarter 2004 the North American bus manufacturer
Prévost Car Inc. became a wholly owned subsidiary of Volvo Bus
Corporation. As part of the restructuring of the bus manufacturer
Henlys Group Plc, Volvo Group reached an agreement to acquire the
remaining 50% of the shares. Prévost Car Inc. was a former 50/50
joint venture between Volvo and Henlys, reported in the Volvo Group
accounts in accordance with the proportionate consolidation
method. The purchase price was USD 83 M including two loans
made available to Prévost Car Inc. by Henlys. Prévost Car Inc. contain the Prévost and Nova brands. Prévost manufactures coaches
and bus shells for luxury mobile homes. Nova Bus manufactures city
buses mainly for the Canadian market.
Axle manufacturing
During the third quarter 2004 Volvo and ArvinMeritor signed a Strategic Alliance Agreement for the supply of axels. As a consequence
of the strategic alliance ArvinMeritor acquired the Volvo’s axle plant
and foundry in Lyon, France.
The effects during 2006, 2005 and 2004 on the Volvo Group’s balance sheet and cash flow statement in connection with the acquisition of subsidiaries and other business units are specified in the
following table:
2004

Cash and cash equivalents according
to acquisition analysis
180
Effect on Group cash and
cash equivalents
(328)

42
(18)

8
(159)

The effects during 2006, 2005 and 2004 includes wholly owned
subsidiaries that previously were accounted for according to the
equity method.

The effects during 2006, 2005 and 2004 on the Volvo Group’s balance sheet and cash flow statement in connection with the divestment of subsidiaries and other business units are specified in
the following table:
Intangible assets
Property, plant and equipment
Assets under operating lease
Inventories
Other receivables
Cash and cash equivalents
Provisions
Other liabilities
Divested net assets
Cash and cash equivalents received
Cash and cash equivalents,
divested companies
Effect on Group cash and
cash equivalents

2004

2005

2006

–
(440)
–
(4)
181
–
94
50
(119)

–
(519)
–
(41)
(334)
(114)
(12)
888
(132)

(2)
(181)
(369)
(254)
(416)
(128)
84
723
(543)

187

782

797

(114)

(128)

668

669

–
187

Non-Current Assets Held for Sale
Volvo Aero Engine Services (VAES)
During the fourth quarter 2006 a strategic decision on closure of
Volvo Aero’s operations in Bromma was decided. In November, it was

Note

5

announced that Volvo Aero had initiated codetermination negotiations with the trade unions relating to the closure of Volvo Aero
Engine Services (VAES) in Bromma, which conducts overhaul of
large aircraft engines. In recent years, the volumes of the engines
overhauled in Bromma have declined sharply. In accordance with the
strategic decision, the operations will be gradually phased out during
2007. Costs for a closure are estimated to 258. The assets and liabilities in the table adjoined are listed to a net realizable value.
Non-Current Assets Held
for Sale1
Tangible assets
Financial assets
Inventories
Short-term recievables
Total assets

2004

2005

2006

–
–
–
–
–

–
–
–
–
–

56
22
480
247
805

–
–
–

–
–
–

7
20
253

–

–

280

Provision for post-employment benefits
Other provisions
Current liabilities
Total shareholders equity
and liabilities

1 Assets and liabilities do not balance since the table only display the assets
and liabilities in Volvo Aero Engine Services held for sale.

Joint ventures

Joint ventures are companies over which Volvo has joint control
together with one or more external parties. Joint ventures are
reported by applying the proportionate consolidation method, in
accordance with IAS 31 Joint ventures. Group holdings of shares in
joint ventures are listed below.
Dec 31, 2006

Shares in Joint ventures
Shanghai Sunwin Bus Corp., China
Xian Silver Bus Corp., China
Volvo’s share of joint ventures’
income statements
Net sales
Operating income
Income after financial items
Income of the period

At the end of 2006 no guarantees were issued for the benefit of
joint ventures, neither by Volvo alone or jointly with other venturers.
At the same date Volvo’s share of contingent liabilities issued by its
joint ventures amounted to 0 (0; 6).

2004

Average number of employees
Shanghai Sunwin Bus Corp.
Xian Silver Bus Corp.
Total number of employees

1 Since the acquisition in March, the holding is reported as an associated
company, since Volvo believes that substantial influence exists. Volvo
reports its share in earnings of Nissan Diesel with a time-lag of one quarter.

Note

7

The table above refers to September 30, 2006, which is when Nissan
Diesel was consolidated by Volvo. Nissan Diesel’s fiscal year is April 1–
March 31.

Segment reporting

Reporting by business segment
The Volvo Group’s operations are organized in eight business areas:
Volvo Trucks, Renault Trucks, Mack Trucks, Buses, Construction
Equipment, Volvo Penta, Volvo Aero and Financial Services. In addition to the eight business areas, there are other operations consisting mainly of business units that are designed to support the business
areas’ operations. The business units include Volvo Powertrain, Volvo
3P, Volvo IT, Volvo Logistics and Volvo Parts.
Each business area, except for Financial Services, has total
responsibility for its operating income, operating capital and operating cash flow. The Financial Services business area has responsibility for its net income and total balance sheet within certain restrictions and principles that are established centrally. The supervision
and coordination of treasury and tax matters is organized centrally to
obtain the benefits of a Group-wide approach. The legal structure of
the Volvo Group is based on optimal handling of treasury, tax and
administrative matters and, accordingly, differs from the operating
structure.
The business units are designated to support the business areas
and are therefore not reportable business segments. In Volvo’s
external financial reporting, the financial results within the business
units Powertrain and Parts are distributed to the respective business
segments. As the three truck brands share product development,

106

Nissan
Diesel1

Financial information 2006

production and other activities in business units such as Volvo 3P
and Volvo Powertrain and also share certain infrastructure in distribution such as dealers, the truck brands are reported as one business segment.
Net sales
Trucks
Buses
Construction Equipment
Volvo Penta
Volvo Aero
Other and eliminations
Volvo Group excl
Financial Services

202,171

Financial Services
Eliminations
Volvo Group total

9,598
7,549
8,969
(693)
1,819
1,731
211,076 240,559 258,835

2004

2005

2006

136,879
12,722
29,360
9,057
6,925
7,228

155,396
16,589
34,816
9,776
7,538
7,076

166,306
16,856
40,564
10,485
8,048
5,876

231,191 248,135

The above sales figures include internal sales in the following
amounts:

Internal sales between business areas are generally made at standard cost of sales, including calculated interest and product improvement expenses. Internal sales from service companies are generally
made at market prices.
Operating income
Trucks
Buses
Construction Equipment
Volvo Penta
Volvo Aero
Financial Services
Other
Volvo Group total

Operating income in 2004 included reversal of write-down of shares
in Scania AB of 915, which was reported in Other and write-down of
shares in Henlys Group Plc of 95, which was reported in Buses.
Operating income in 2006 includes adjustment of goodwill of
(1,712), which was reported in Trucks.
Depreciation and amortization
2004
Trucks
5,306
Buses
219
Construction Equipment
627
Volvo Penta
122
Volvo Aero
391
Other
220
Total excl Financial Services
6,885
Financial Services
3,117
Reclassification Group versus segment
Financial Services
–
10,002
Volvo Group total 1

2005

2006

5,307
249
658
224
366
88
6,892

7,820
281
802
205
363
23
9,494

429

344

2,573
9,894

2,545
12,383

1 Of which write-down 80 (72; 244).

Research and development
expenses
Trucks
Buses
Construction Equipment
Volvo Penta
Volvo Aero
Other
Volvo Group total

Gains/losses on currency related forward and options contracts
Exchange rate differences on trade receivables and payables
Gains/losses on divestment of group companies
Change in allowances and write offs for doubtful receivables, customer financing
Change in allowances, and write offs for doubtful receivables, other
Expenses for industrial relocation of Renault Trucks Villaverde plant in Spain
Expenses for closing Volvo Buses Heilbronn plant in Germany
Expenses for closing Volvo operations in Bromma, Sweden
Volvo profit sharing program
Adjustment of goodwill in the subsidiary Mack Trucks
Other income and expenses
Total

108

2004

119,077
54,769
7,338
20,789
9,103
211,076

Financial information 2006

2004

2005

828
(86)
69
(545)
37
(470)
–
–
(200)
–
(250)
(618)

(566)
481
697
(460)
(133)
–
(95)
–
(419)
–
(93)
(588)

2006

481
(825)
286
(189)
(273)
–
–
(258)
(444)
(1,712)
(532)
(3,466)

Note

9

Income from investments in associated companies

Income from investments in associated companies are specified
below:
Income/loss

Financial instruments at fair value through profit or loss
Exchange rate gains and losses on financial assets and liabilites
Financial income and expenses related to taxes
Write-down pertaining to the restructuring of Henleys Group Plc
Costs for Treasury function, credit facilities, etc
Total

2004

–
(1)
–
(1,196)
(13)
(1,210)

2005

2006

251
(20)
56
–
(106)
181

(61)
(52)
(22)
–
(46)
(181)

Financial information 2006 109

The Volvo Group

Notes to consolidated financial statements

Note

12

Income taxes

Income taxes were distributed as follows:
2004

Current taxes relating to the period (1,854)
Adjustment of current taxes for
prior periods
288
Deferred taxes originated or
reversed during the period
(1,662)
Recognition and derecognition of
deferred tax assets
99
Total income taxes
(3,129)

2005

2006

(2,568)

(4,559)

147

176

(2,933)

(2,116)

446
(4,908)

2,518
(3,981)

Provisions have been made for estimated tax charges that may arise
as a result of prior tax audits in the Volvo Group. Volvo evaluates tax
processes on a regular basis and makes provisions for possible outcome when it is probable that Vovo will have to pay more taxes and
when it is possible to make a reasonably assessment of the possible
outcome. Tax claims for which no provision has been deemed necessary of approximately 983 (695; 1,433) were reported as contingent
liabilities.
Deferred taxes relate to income taxes payable or recoverable in
future periods in respect of taxable temporary differences, deductible temporary differences, unused tax loss carryforwards or unused
tax credit carryforwards. Deferred tax assets are recognized to the
extent that it is probable that the amount can be utilized against
future taxable income. At December 31, 2006, the valuation allowance attributable to deductible temporary differences, unused tax
loss carryforwards and unused tax credit carryforwards for which no
deferred tax asset was recognized amounted to 213 (2,972; 2,592).
Deferred taxes of 265 (negative 129; -) have at December 31,
2006, been accounted for as a direct reduction of equity. It is related
to fair value of derivative instruments
At year-end 2006, the Group had unused tax loss carryforwards
of about 5,900 (6,100; 10,100). These loss carryforwards expire
according to the table below.
Due date
2004
2005
2006
Within 1 year
200
400
500
Within 2 years
700
500
100
Within 3 years
600
100
100
Within 4 years
300
300
0
Within 5 years
200
100
200
After 6 years
8,100
4,700
5,000
Total
10,100
6,100
5,900
The Swedish corporate income tax rate is 28%. The table below
shows the principal reasons for the difference between this rate and
the Group’s tax rate, based on income after financial items.
2004, %

110

2005, %

2006, %

Swedish corporate income tax rates
Difference in tax rate in various countries
Capital gains
Other non-taxable income
Other non-deductible expenses
Adjustment of current taxes for prior years
Recognition and derecognition of
deferred tax assets
Other, net

28
3
(3)
(3)
2
(2)

28
3
(1)
(1)
1
(1)

28
2
0
(1)
4
(1)

(1)
0

(2)
0

(12)
0

Income tax rate for the Group

24

Financial information 2006

27

20

Reversal of reserve for deferred tax receivables
During the third quarter, AB Volvo decided to reverse a valuation
reserve for deferred tax receivables in the Mack Trucks subsidiary.
The decision was based on the fact that Volvo assesses that the
company has a long-term higher profitability. Reporting of the
deferred tax receivables reduced tax expenses in the income statement in the third quarter by 2,048. In accordance with prevailing
accounting rules, Volvo adjusted goodwill by 1,712, which affected
operating income adversely. The combined earnings effect for the
third quarter was a positive 336.
Most of the valuation reserve for deferred tax receivables that was
reported in Mack Trucks was attributable to the time of the acquisition of Renault Trucks and Mack Trucks. In accordance with IAS 12,
a reversal of valuation reserves attributable to an acquisition was
adjusted against the earlier reported goodwill. In an acquisition, the
acquired company’s assets and liabilities are valued at fair value. In
the case that the purchase consideration exceeds the revalued net
assets, goodwill is reported. Normally, a so-called acquisition balance sheet is preliminary for 12 months during which period it may
be changed in the case that another assessment is made in the net
value of the assets. If a change occurs, a corresponding adjustment
is made in goodwill. Changed assessments arising later are adjusted
in the income statement but do not affect the goodwill value. An
exception to this main rule is the case that a valuation reserve has
been reported for deferred tax receivables. If such a valuation
reserve is reversed at a later date, regardless of when in time, such
a reversal shall be reported as if the deferred tax receivables value
was reported at the time of the acquisition and that this value was
included in the acquired company’s net assets. Consequently, this
affects the original goodwill calculation. This means that in the item
Other operating income and expenses, Volvo has reported an
expense in the truck operations for the third quarter for adjustment
of goodwill of 1,712. The Volvo Group’s earnings for the period were
affected positively by 336.
Specification of deferred tax assets
2004
and tax liabilities
Deferred tax assets:
Unused tax loss carryforwards
3,223
Other unused tax credits
259
Intercompany profit in inventories
294
Valuation allowance for doubtful
receivables
587
Provisions for warranties
966
Provision for residual value risks
544
Provisions for
post-employment benefits
4,366
Provisions for restructuring
measures
220
Fair value of derivative instruments:
Change of hedge reserves
–
Other deductible temporary
differences
2,347
Deferred tax assets before
deduction for valuation
allowance
12,806
Valuation allowance
Deferred tax assets after
deduction for valuation
allowance

The cumulative amount of undistributed earnings in foreign subsidiaries, which Volvo currently intends to indefinitely reinvest outside of
Sweden and upon which deferred income taxes have not been provided is approximately 29 billion (17; 12) at year end. There are different taxation rules depending on country, some which have no tax
effect and some countries with withholding taxes. See note 36 how
Volvo handles equity currency risk.

1 Deferred taxes are partially recognized in the balance sheet on a net basis
after taking into account offsetting possibilities.

Note

13

Minority interests

Minority interests in income (loss) for the period and in shareholders’ equity consisted mainly of the minority interests in Volvo Aero Norge AS
(22%), in Wuxi da Hao Power Co, Ltd (30%) and in Berliet Maroc S.A (30%).

1 Includes on the date of IFRS adoption, acquisition costs of 14,184 and
accumulated amortization of 3,863.
2 Machinery and equipment pertains mainly to production equipment.
3 Includes subsidiaries and joint ventures that previously were accounted for
according to the equity method.

“Reclassifications and other” mainly consist of “assets under operating leases” related to legal sales transactions, where revenue is
deferred and accounted for as operating lease revenue. Assets classified as inventory will, when the operating lease model is applied for
revenue recognition, be classified from “inventory” to “assets under
operating leases”, when the legal sales transaction occurs. If the
product is returned after the lease period, there will again be a

reclassification from “assets under operating leases” to “inventory”.
When a buy-back agreement has expired, but the related product is
not returned, the acquisition cost and the accumulated depreciation
are reversed in “reclassification and other”, within the line item
“assets under operating leases”. Some of the reclassifications within
tangible assets relate to construction in progress, which are reclassified to the respective category within property, plant and equipment.

Depreciation and
amortization by type of asset
Intangible assets
Property, plant and equipment
Assets under operating leases
Depreciations excluding
adjustment of goodwill
Adjustment of goodwill
Total

Capital expenditures for property, plant and equipment approved but not yet implemented at December 31, 2006, amounted to SEK 6.8 billion (7.8).

112

Financial information 2006

Goodwill
AB Volvo decided during the third quarter 2006 to reverse a valuation allowance for deferred tax receivables in the Mack Trucks
subsidiary. The decision is based on the fact that Volvo assesses
that the company has a long-term higher profitability. Reporting of
the deferred tax receivables reduced tax expenses in the income
statement in the third quarter by 2,048. In accordance with prevailing accounting rules, Volvo adjusted goodwill by 1,712. The adjustment decreases book value of goodwill for the three truck brands
with the same share that was used in the original allotment. The
remaining deviation in book value compared to the previous year
mainly consists of revaluation effects caused by differences in currency rates.
Annually, in connection with the annual closing, or more frequently
if required, Volvo’s operations are evaluated and compared with its
carrying value in order to identify any impairment of goodwill assets.
Volvo’s evaluation model is based on a discounted cash-flow model,
with a forecast period of four years. Evaluation is made on cash-generating units, identified as Volvo’s operational areas or business
areas. Goodwill assets are allocated to these cash generating units
on the basis of anticipated future utility. The evaluation is based on
management’s best judgment of the operations’ development. The
basis for this judgment is long-term forecasts of the market’s
growth, two to four percent, in relation to the development of Volvo’s
operations. In the model, Volvo is expected to maintain stable capital
efficiency over time. The evaluation is made on nominal value and
the general rate of inflation, in line with the European target, is used.
Volvo uses a discounting factor calculated to 12% before tax for
2006.

During 2006, the value of Volvo’s operations has exceeded the
carrying value of goodwill for all operational areas, and accordingly,
no impairment was recognized. For the specified cash generating
units Volvo has evaluated the value of goodwill with reasonable
changed assumptions, negatively adjusted with one percentage
point, where of no adjustment, individually, would have such a big
effect that there would be an impairment.
Goodwill per Business Area
Volvo Trucks
Renault Trucks
Mack Trucks
Buses
Construction Equipment
Other
Total goodwill value

2005

2006

4,096
2,007
982
1,134
2,480
373
11,072

3,129
1,391
592
1,055
2,329
353
8,849

Investment property
Investment property is property owned for the purpose of obtaining
rental income and/or appreciation in value. The acquisition cost of
investment property was 1,633 (1,534; 1,859) at year-end. Capital
expenditures during 2006 amounted to 81 (15; 20). Accumulated
depreciation was 523 (463; 472) at year-end, whereof 55 (53; 68)
during 2005. The estimated fair value of investment property was
SEK 1,9 billion (1,9; 2,2) at year-end, based on the yield. The
required return is based on current property market conditions for
comparable properties in comparable locations. All investment properties were leased out during the year. Net income for the year was
affected by 281 (272; 332) in rental income from investment properties and 50 (45; 66) in direct costs.

2 Deutz AG is valued to market value as from January 1, 2005 according to
IAS 39, more information note 1 Accounting principles and note 3 Effects
of IFRS. The transition effect has been charged to equity.

The market values of Volvo’s holdings of shares and participations in
listed companies as of December 31, 2006 are shown in the table
below. As from 2005 shares in listed companies would be revaluated
to current market value. The revaluation is booked to Equity and
amounts to 392 (83; –).

Carrying value

Market value

Deutz AG
Total holdings in listed companies

740
740

740
740

Holdings in non-listed companies 1
Total shares and participations
in other companies

Nissan Diesel
On March 21, AB Volvo acquired 40 million shares, corresponding to
13% of the shares, in the Japanese truck manufacturer Nissan
Diesel from Nissan Motor for approximately SEK 1,5 billion, with an
option on Nissan Motor’s remaining 6% within four years. During the
third quarter, AB Volvo exercised its option to purchase an additional
6% of the shares in Nissan Diesel from Nissan Motor for approxi-

114

Percentage
holding

Financial information 2006

1 Unlisted shares, for which a reliable fair value cannot be determined, should
be reported at the acquisition value reduced in appropriate cases by writedowns.

mately SEK 500 M. AB Volvo owned a total of 19% of the shares in
the Japanese truck manufacturer at December 31, 2006. In addition,
AB Volvo acquired all 57.5 million preference shares in Nissan
Diesel from Nissan Motor and Japanese banks for a total of SEK 3.5
billion. The book value for the shares in Nissan Diesel was SEK
5.445 M at December 2006.

The holding is reported as an associated company, since Volvo
believes that substantial influence exists. Executive Vice President
of AB Volvo and Deputy CEO of the Volvo Group, Jorma Halonen,
was appointed Vice Chairman of the Board of Directors of Nissan
Diesel on June 28.
Volvo reports its share in earnings of Nissan Diesel with a timelag of one quarter.
Please find further information under Significant events, page 47,
regarding Volvo making a public offer for Nissan Diesel.
Deutz
During 2006 Volvo has invested additionaly 95 in Deutz AG.

bus manufacturer Blue Bird). Volvo’s holding in Peach County Holdings Inc was 42,5%. During the fourth quarter of 2005 Volvo wrote
down its shareholding in Peach County Holdings, Inc. by about 550.
At December 31, 2005 Volvo held 42.5% of the US-based company.
Since its reconstruction in the preceding year, Blue Bird has not
developed well. The write-down was made as a consequence of
Volvo’s decision not to participate in continued financing efforts.
After the write-down, the value is zero. In January 2006, Peach
County Holdings entered into reconstruction proceedings (Chapter
11) and as a consequence of Volvo choosing not to participate in the
continued reconstruction, Volvo’s shares in the company were cancelled.

Peach County Holdings Inc
In 2004, as a part of the restructuring of Henlys Group Plc, see
note 11, the convertible debenture loan issued to Henlys was partly
converted into shares in Peach County Holdings (owner of school

Småföretagarinvest AB (previously Arbustum Invest AB)
In 2005, Volvo’s holding in Småföretagarinvest AB decreased to
17% and the company is no longer considered as an associated
company.

Changes in the Volvo Group’s holdings of shares and participations:
Balance sheet, December 31, preceding year
IFRS transition effect
Acquisitions and divestments, net
Net of write-downs/revaluations
New issue of shares and shareholders’ contributions
Share of income in associated companies
Change in Group structure
Fair value of shares
Translation differences
Dividends
Other
Balance sheet, December 31

The share capital of the Parent Company is divided into two series of
shares: A and B. Both series carry the same rights, except that each
Series A share carries the right to one vote and each Series B share
carries the right to one tenth of a vote. The shares quota value is
SEK 6.00.
Total share capital by year end 2004 amounted to 2,649 and was
based on 441,520,885 registered shares. During 2005 share capital
was reduced by 95 through cancellation without repayment of

3,084,619 Series A shares and 12,752,222 Series B shares. After
reduction share capital amounts to 2,554 and is based on
425,684,044 registered shares.
Cash dividend decided by the Annual General Meeting 2006 was
SEK 16.75 (12.50; 8.00) per share or total 6,775 (5,055; 3,356).
Unrestricted equity in the Parent Company at December 31, 2006
amounted to 39,345 (41,220; 44,075).

Financial information 2006

117

The Volvo Group

Notes to consolidated financial statements

Information regarding shares
Own Series A shares
Own Series B shares
Total own shares

2004

2005

2006

7,075,246
24,315,797
31,391,043

4,145,627
17,074,908
21,220,535

4,145,627
16,739,827
20,885,454

7,1

5,0

4,9

Outstanding Series A shares
Outstanding Series B shares
Total outstanding shares

131,529,699
278,600,143
410,129,842

131,374,699
273,088,810
404,463,509

131,374,699
273,423,891
404,798,590

Total registered Series A shares
Total registered Series B shares
Total registered shares

138,604,945
302,915,940
441,520,885

135,520,326
290,163,718
425,684,044

135,520,326
290,163,718
425,684,044

418,528,078

405,242,037

404,663,051

Hedgereserve

Available for
sale-reserve

Own shares in % of total registered shares

Average number of outstanding shares
Changes in outstanding Volvo shares
Balance December 31, 2005
Share-based incentive program

404,463,509
335,081
404,798,590

Change in other reserves
Balance at January 1, 2006
Fair value gains in year
Tax on fair value gains
Transfers to income
Tax on transfers to income statement
Change in fair value of commodity contracts
Fair value adjustments regarding holding in Deutz
Fair value adjustments regarding holding in Nissan Diesel
Other
Balance at December 31, 2006
Earnings per share
Earnings per share is calculated as income for the period, attributable to the Parent Company’s shareholders, divided by the Parent
Company’s average number of shares outstanding for the fiscal year.
Diluted earnings per share is calculated as income for the period
attributable to the Parent Company’s shareholders divided by the
average number of shares outstanding plus the average number of
shares that would be issued as in effect of ongoing share-based
incentive programs and employee stock option programs. If during
the year there were potential shares redeemed or expired during the
period, these are also included in the average number of shares
used to calculate the earnings per share after dilution. To the extent
that employee stock options are not fully earned, the average price
of the share is adjusted.
The share-based incentive program creates a dilution effect when
the non-market-based financial goals are achieved for the fiscal year.
Similarly, the employee stock option program creates a dilution
effect by taking into account the difference between the exercise
price and the share’s average market price to determine how many
shares that are assumed to be issued without any payment. It is
solely this number of shares that have an effect on the calculated
diluted earnings. The number of shares that this value symbolizes is
less than the total potential number of shares attributable to the
employee stock option program.

118

Financial information 2006

(411)
2,583
(723)
(1,122)
314
(53)
–
–
(67)
521

83
–
–
–
–
–
392
(9)
–
466

Total

(328)
2,583
(723)
(1,122)
314
(53)
392
(9)
(67)
987

2005

2006

Number of shares, December 31, in millions 404.5
Average number of shares before
dilution in millions
405.2
Average number of shares after
dilution in millions
405.9
Average share price, SEK
319,11

404.8

405.0
391,94

Net income attributable to
Parent Company shareholders
Basic earnings per share
Diluted earnings per share

13,054
32.22
32.16

16,268
40.20
40.17

166,250
459,241

72,583
242,900

625,491

315,483

Dilution effect, number of shares
Share-based incentive program
Employee stock option program
Number of potential shares,
December 31

404.7

The share-based incentive program is implemented if certain nonmarket based financial goals are fulfilled partly or wholly. The
requirement for 2006 was met and creates a dilution effect amounting to 72,583 shares. The employee stock option program create a
dilution effect amounting to 242,900 shares. In this case, the difference between the exercise price and the share’s average value
under the actual period has been taken into account. No other transactions have occurred that affected, or will have an effect on, the
compilation of the reported share capital.

Note

24

Provisions for post-employment benefits

Post-employment benefits, such as pensions, healthcare and other
benefits are mainly settled by means of regular payments to independent authorities or bodies that assume pension obligations and
administer pensions through defined contribution plans. The remaining post-employment benefits are defined benefit plans; that is, the
obligations remain within the Volvo Group or are secured by own
pension foundations. Costs and the obligations at the end of period
for defined benefit plans are calculated based on actuarial assumptions and measured on a discounted basis. The Volvo Group defined
benefits plans relate mainly to subsidiaries in the US and comprise
both pensions and other benefits, such as healthcare. Other largescale defined benefit plans apply for salaried employees in Sweden

(mainly through the Swedish ITP pension plan) and employees in
France and Great Britain. See note 1 for further information about
the accounting principles.
The following tables disclose information about defined benefit
plans in the Volvo Group. Volvo report the difference between the
obligations and the plan assets adjusted for actuarial gains and
losses in the balance sheet. The information refers to assumptions
applied for actuarial calculations, periodical costs and the value of
obligations and plan assets at year-end. The tables also include
reconciliation of obligations and plan assets during the year and the
difference between fair values and carrying amounts reported on
the balance sheet date.

1 Applicable for the following accounting period. These assumptions reflect
the expected long-term return rate on plan assets, based upon historical
yield rates for different categories of investments and weighted in accordance with the foundation’s investment policy. The expected return has been
calculated net of administrative expenses and applicable taxes.

1 For each plan, actuarial gains and losses are reported as income or expenses, when the accumulated amount exceeds the so called corridor. The income or
expenses are then recognized over the expected average remaining service period of the employees.

Costs for post-employment benefits other than pensions
Current year service costs
Interest costs
Expected return on plan assets
Actuarial gains and losses 1
Past service costs
– Unvested
– Vested
Curtailments and settlements
Termination benefits
Total costs for post-employment benefits other than pensions

2004

2005

2006

196
349
(12)
6

188
323
(15)
1

132
348
(4)
1

(1)
5
–
47
590

(1)
4
–
24
524

(9)
(17)
3
8
462

1 For each plan, actuarial gains and losses are reported as income or expenses, when the accumulated amount exceed the so called corridor. The income or
expenses are then recognized over the expected average remaining service period of the employees.

An increase of one percentage point per year in healthcare costs
would change the accumulated post-employment benefit obligation
as of December 31, 2006 by approximately 193, and the postemployment benefit expense by approximately 18. A decrease of one
percentage point would decrease the accumulated value of obliga-

tions by about 164 and reduce costs by approximately 15. Calculations made as of December 31, 2006 show an annual increase of
10% in the weighted average per capita costs of covered healthcare
benefits; it is assumed that the percentage will decline gradually to
5% and then remain at that level.